As filed with the Securities & Exchange Commission November 30, 1995
File Nos.
2-11346
811-537
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post Effective Amendment No. 72 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 18 (X)
FRANKLIN CUSTODIAN FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (415) 312-2000
Harmon E. Burns, 777 Mariners Island Blvd., San Mateo, CA 94404
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ]immediately upon filing pursuant to paragraph (b)
[ ]on (date) pursuant to paragraph (b)
[ ]60 days after filing pursuant to paragraph (a)(i)
[x]on February 1, 1996 pursuant to paragraph (a)(i)
[ ]75 days after filing pursuant to paragraph (a)(ii)
[ ]on (date) pursuant to paragraph (a)(ii)of rule 485
If appropriate, check the following box:
[ ]This post-effective amendment designates a new effective date for a
previously filed post-effective amendment
Calculation of Registration Fee Under the Securities Act of 1933
Title of Proposed Amount
Securities Amount Maximum Proposed of
Being Being Offering Price Aggregate Offering
Registered Registered* Per Share Price* Fee*
________________________________________________________________
Capital 19,070,307 $21.15 $289,988 $100
Stock___________________________________________________________
*Registrant elects to calculate the maximum aggregate offering price pursuant to
Rule 24e-2. 769,308,676 shares were redeemed during the fiscal year ended
September 30, 1995. 750,252,080 shares were used for reductions pursuant to
Paragraph (d) of Rule 24f-2 during the current year. 19,056,596 shares is the
amount of redeemed shares used for reduction in this amendment. Pursuant to
457(d) under the Securities Act of 1933, the maximum public offering price of
$21.15 per share on November 17,1995, is the price used as the basis for these
calculations. The maximum public offering price per share varies and, thus, may
be higher or lower than $21.15 in the future. While no fee is required for the
19,056,596 shares, the registrant has elected to register, for $100, an
additional $289,988 of shares (approximately 13,711 shares at $21.15 per share).
As part of its initial registration statement, the registrant has elected to
register an indefinite number of shares pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended, and hereby continues such election.
The registrant filed the notice required by Rule 24f-2 for its most recent
fiscal year on November 24, 1995.
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in the Prospectus
(All Series Prospectus)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial "Financial Highlights - How Has the
Information Fund Performed?"; "How Does the Fund
Measure Performance?"
4. General Description "What Is the Fund?"; "How Does the
Fund Invest Its Assets?"; "What Are
the Potential Risks Relating to High
Yield Securities?"; "General
Information"
5. Management of the Fund "Who Manages the Fund?"; "Who Runs
the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "What Distributions Might I Receive
Securities from the Fund?"; "General
Information"
7. Purchase of Securities "How Do I Buy Shares?"; "How
Being Offered Taxation Affects You and the Fund";
"What Programs and Privileges Are
Available to Me as a Shareholder?";
"How Are Fund Shares Valued?";
"Telephone Transactions"
8. Redemption or Repurchase "How Do I Sell Shares"; "How Are
Fund Shares Valued?"; "How Do I Get
More Information About My
Investment?"; "General Information";
"Telephone Transactions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in the Prospectus
(U.S. Government Securities Series)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial "Financial Highlights - How Has the
Information Fund Performed?"; "How Does the
Fund Measure Performance?"
4. General Description "What Is the U.S. Government
Securities Series?"; "How Does the
Fund Invest Its Assets?"; "General
Information"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "What Distributions Might I Receive
Securities from the Fund?"; "General
Information"
7. Purchase of Securities "How Do I Buy Shares?"; "How
Being Offered Taxation Affects You and the Fund";
"What Programs and Privileges Are
Available to Me as a Shareholder?";
"How Are Fund Shares Valued?";
"Telephone Transactions"
8. Redemption or Repurchase "How Do I Sell Shares"; "How Are
Fund Shares Valued?"; "How Do I Get
More Information About My
Investment?"; "General
Information"; "Telephone
Transactions"
9. Pending Legal Proceedings Not Applicable
FRANKLIN CUSTODIAN FUNDS, INC.
CROSS REFERENCE SHEET
FORM N-1A
Part A: Information Required in the Prospectus
(Income Series)
N-1A Location in
Item No. Item Registration Statement
1. Cover Page Cover Page
2. Synopsis Expense Table
3. Condensed Financial "Financial Highlights - How Has the
Information Fund Performed?"; "How Does the
Fund Measure Performance?"
4. General Description "What Is the Income Series?"; "How
Does the Fund Invest Its Assets?";
"What Are the Potential Risks
Relating to High Yield
Securities?"; "General Information"
5. Management of the Fund "Who Manages the Fund?"
5A. Management's Discussion of Contained in Registrant's Annual
Fund Performance Report to Shareholders
6. Capital Stock and Other "What Distributions Might I Receive
Securities from the Fund?"; "General
Information"
7. Purchase of Securities "How Do I Buy Shares?"; "How
Being Offered Taxation Affects You and the Fund";
"What Programs and Privileges Are
Available to Me as a Shareholder?";
"How are Fund Shares Valued?";
"Telephone Transactions"
8. Redemption or Repurchase "How Do I Sell Shares"; "How Are
Fund Shares Valued?"; "How Do I Get
More Information About My
Investment?"; "Telephone
Transactions"; "General Information"
9. Pending Legal Proceedings Not Applicable
Part B: Information Required in the
Statement of Additional Information
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and "General Information"
History
13. Investment Objectives and "How Does the Fund Invest It's
Policies Assets?"; "What Are the Fund's
Potential Risks?"
14. Management of the Fund "Officers and Directors"
15. Control Persons and "Officers and Directors"; "General
Principal Holders of Information"
Securities
16. Investment Advisory and "Who Manages the Fund?"; "The
Other Services Fund's Underwriter"
17. Brokerage Allocation "How Does the Fund Purchase
Securities For Its Portfolio?"
18. Capital Stock and Other See section "General Information"
Securities in the Prospectuses
19. Purchase, Redemption and "How Do I Buy and Sell Shares?";
Pricing of Securities "How are Fund Shares Valued?"
Being Offered
20. Tax Status "Additional Information Regarding
Taxation"
21. Underwriter "The Fund's Underwriter"
22. Performance Data "General Information"
23. Financial Statements Financial Statements
FRANKLIN
CUSTODIAN
FUNDS, INC.
GROWTH SERIES, DYNATECH SERIES,
UTILITIES SERIES, INCOME SERIES,
U.S. GOVERNMENT SECURITIES SERIES
PROSPECTUS FEBRUARY 1, 1996
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
Franklin Custodian Funds, Inc. (the "Fund") is an open-end management investment
company consisting of the five separate diversified series listed above
(individually or collectively referred to as the "Series"). Each Series, in
effect, represents a separate fund with its own investment objectives and
policies with various possibilities for income or capital appreciation and
subject to varying market risks. Through the five different Series, the Fund
attempts to satisfy a variety of investment objectives.
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund and each Series that you should know before
investing. After reading the Prospectus, it should be retained for future
reference; it contains information about the purchase and sale of shares and
other items which you will find useful to have.
The Growth Series, Utilities Series, Income Series, and U.S. Government
Securities Series offer two classes to their investors: the Growth Series -
Class I, Utilities Series - Class I, Income Series - Class I, and U.S.
Government Securities Series - Class I (individually or collectively, "Class I")
and the Growth Series - Class II, Utilities Series - Class II, Income Series -
Class II, and U.S. Government Securities Series - Class II (collectively or
individually, "Class II"). THE DYNATECH SERIES OFFERS ONLY ONE CLASS OF SHARES
("DYNATECH SERIES - CLASS I) AND IS INCLUDED IN ALL DISCUSSIONS OF CLASS I
SHARES IN THIS PROSPECTUS. You can choose between Class I shares, which
generally bear a higher front-end sales charge and lower ongoing Rule 12b-1
distribution fees ("Rule 12b-1 fees"), and Class II shares, which generally have
a lower front-end sales charge and higher ongoing Rule 12b-1 fees. You should
consider the differences between the two classes, including the impact of sales
charges and rule 12b-1 fees, in choosing the more suitable class given your
anticipated investment amount and time horizon. See "How Do I Buy Shares? -
Differences Between Class I and Class II."
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THE INCOME SERIES MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON-INVESTMENT GRADE
BONDS, COMMONLY KNOWN AS "JUNK BONDS," WHICH ENTAIL DEFAULT AND OTHER RISKS
GREATER THAN THOSE ASSOCIATED WITH HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY
ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE INCOME SERIES IN LIGHT OF
THE SECURITIES IN WHICH THE SERIES INVESTS. SEE "WHAT ARE THE POTENTIAL RISKS
RELATING TO HIGH YIELD SECURITIES?"
The Growth Series, DynaTech Series, Utilities Series, and Income Series may
invest in domestic and foreign securities as described under "How Does the Fund
Invest Its Assets?"
A Statement of Additional Information (the "SAI") concerning the Fund, dated
February 1, 1996, and as may be further amended from time to time, provides a
further discussion of certain areas in this Prospectus and other matters which
may be of interest to you. It has been filed with the Securities and Exchange
Commission ("SEC") and is incorporated herein by reference. A copy is available
without charge from the Fund or the Fund's principal underwriter,
Franklin/Templeton Distributors, Inc. ("Distributors"), at the address or
telephone number shown above.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER.
CONTENTS PAGE
Expense Table
Financial Highlights - How Has the Fund Performed?
What Is the Fund?
How Does the Fund Invest Its Assets?
What Are the Potential Risks Relating to High Yield Securities?
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
Who Runs the Fund?
Appendix
EXPENSE TABLE
The purpose of these tables is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in each Series of the Fund. These figures are based on aggregate
operating expenses of each Series' shares for the fiscal year ended September
30, 1995.
<TABLE>
CLASS I
<CAPTION>
U.S.
GOVERN-
MENT DYNA-
GROWTH UTILITIES INCOME SECURITIES TECH
SERIES SERIES SERIES SERIES SERIES
<S> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed
on Purchases (as a percentage of
offering price) 4.50% 4.25% 4.25% 4.25% 4.50%
Deferred Sales Charge
NONE* NONE* NONE* NONE* NONE*
Exchange Fee (per
transaction) NONE $5.00** $5.00** $5.00** NONE
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees 0.50% 0.46% 0.46% 0.45% 0.63%
Rule 12b-1 Fees 0.20%*** 0.12%*** 0.13%*** 0.08%*** 0.18***
Other Expenses:
Shareholder Servicing 0.10% 0.07% 0.05% 0.04% 0.11%
costs
Reports to 0.08% 0.06% 0.04% 0.03% 0.04%
Shareholders
Other 0.02% 0.02% 0.03% 0.01% 0.05%
----- ----- ----- ----- -----
Total Other Expenses
0.20% 0.15% 0.12% 0.08% 0.20%
----- ----- ----- ----- -----
Total Fund Operating
Expenses
0.90% 0.73% 0.71% 0.61% 1.01%
===== ===== ===== ===== =====
*Class I investments of $1 million or more are not subject to front-end sales
charge; however, a contingent deferred sales charge of 1% is generally
imposed on certain redemptions within a "contingency period" of 12 months of
the calendar month of such investments. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
**$5.00 fee is imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
***The maximum amounts of Rule 12b-1 fees allowed pursuant to the Class I
distribution plans are 0.25% per annum for the Growth Series and Dynatech Series
and 0.15% per annum for the Utilities Series, Income Series and U.S. Government
Securities Series. Consistent with National Association of Securities Dealers,
Inc.'s rules, it is possible that the combination of front-end sales charges and
Rule 12b-1 fees could cause long-term shareholders to pay more than the economic
equivalent of the maximum front-end sales charges permitted under those same
rules.
CLASS II
<CAPTION>
U.S.
GOVERN-
MENT
GROWTH UTILITIES INCOME SECURITIES
SERIES SERIES SERIES SERIES
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed
on Purchases (as a percentage
of
offering price) 1.00%+ 1.00%+ 1.00%+ 1.00%+
Deferred Sales Charge
1.00%* 1.00%* 1.00%* 1.00%*
Exchange Fee (per
transaction) NONE $5.00** $5.00** $5.00**
ANNUAL FUND OPERATING
EXPENSES
(as a percentage of
average net assets)
Management Fees 0.50% 0.46% 0.46% 0.45%
Rule 12b-1 Fees*** 1.00% 0.65% 0.65% 0.65%
Other Expenses:
Shareholder Servicing
costs 0.10% 0.07% 0.05% 0.04%
Reports to
Shareholders 0.08% 0.06% 0.04% 0.03%
Other 0.02% 0.02% 0.03% 0.01%
----- ----- ----- -----
Total Other Expenses 0.20% 0.15% 0.12% 0.08%
----- ----- ----- -----
Total Fund Operating
Expenses
1.70% 1.26% 1.23% 1.18%
===== ===== ===== =====
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fee for Class II may cause you to pay more for Class II
shares than for Class I shares. Given the maximum front-end sales charge and the
rate of Rule 12b-1 fees of each class, it is estimated that this will take less
than six years if you maintain total shares valued at less than $100,000 in the
Franklin Templeton Funds. If your investments in the Franklin Templeton Funds
are valued at $100,000 or more, you will reach the crossover point more quickly.
See "How Do I Buy Shares? - Purchase Price of Fund Shares" for the definition of
Franklin Templeton Funds and similar references.
*Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred
sales charge. See "How Do I Sell Shares? - Contingent Deferred Sales
Charge."
**$5.00 fee is imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
***Consistent with National Association of Securities Dealers, Inc.'s rules, it
is possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
You should be aware that the above tables are not intended to reflect in precise
detail the fees and expenses associated with an investment in any Series of the
Fund. Rather, the tables have been provided only to assist you in gaining a more
complete understanding of the fees, charges and expenses. For a more detailed
discussion of these matters, you should refer to the appropriate sections of
this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charge, that apply to a $1,000 investment in each Series over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
CLASS I*
<CAPTION>
U.S.
GOVERN-
MENT DYNA-
GROWTH UTILITIES INCOME SECURITIES TECH
SERIES SERIES SERIES SERIES SERIES
------ ------ ------ ------ ------
<C> <C> <C> <C> <C> <C>
1 Year $54 $50 $49 $48 $55
3 Years $72 $65 $64 $61 $76
5 Years $93 $81 $80 $75 $98
10 Years $151 $129 $127 $115 $163
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
CLASS II
<CAPTION>
U.S.
GOVERN-
MENT
GROWTH UTILITIES INCOME SECURITIES
SERIES SERIES SERIES SERIES
<C> <C> <C> <C> <C>
1 Year $37 $33 $32 $32
3 Years $63 $50 $49 $47
5 Years $101 $78 $77 $74
10 Years $209 $161 $157 $152
You would pay the following expenses on the same investment, assuming no
redemption:
<CAPTION>
U.S.
GOVERN-
MENT
GROWTH UTILITIES INCOME SECURITIES
SERIES SERIES SERIES SERIES
<C> <C> <C> <C> <C>
1 Year $27 $23 $22 $22
3 Years $63 $50 $49 $47
5 Years $101 $78 $77 $74
10 Years $209 $161 $157 $152
THIS EXAMPLE IS BASED ON THE ANNUALIZED AGGREGATE ANNUAL OPERATING EXPENSES
SHOWN ABOVE AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, WHICH MAY BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are
borne by each Series of the Fund and only indirectly by you as a result of your
investment in the Series. In addition, federal securities regulations require
the example to assume an annual return of 5%, but the actual return for each
Series may be more or less than 5%.
</TABLE>
FINANCIAL HIGHLIGHTS - HOW HAS THE FUND PERFORMED?
Set forth below is a table containing the financial highlights for a share of
each class of each Series of the Fund through the ten fiscal years ended
September 30, 1995. The information for each of the five fiscal years in the
period ended September 30, 1995 has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Fund's Annual Report to Shareholders dated September 30, 1995. The remaining
figures, which are also audited, are not covered by the auditor's current
report. See the discussion "Reports to Shareholders" under "General Information
in this Prospectus."
<TABLE>
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data+++
_____________________________________________________ ___________________________
Net Real- Distri- Distri- Net Ratio of Net
Net Asset Net ized & Un- butions butions Net Asset Assets Ratio of Investment
Year Value Invest-realized Gain TotalFrom From Net From Total Value at End Expenses Income to Portfolio
Ended Beginning ment (Loss)on InvestmentInvestment Realized Distri- at End Total of Year to Average Average Turnover
Sep.30of Year Income Securities Operations Income Capital Gains butions of Year Return**(in 000's)Net Assets Net Assets Rate
Growth Fund:**
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 $6.20 $0.157 $1.374 $1.531 $(0.130) $(0.091) $(0.221) $7.51 24.72% $ 42,861 0.87% 2.12% 1.00%
1987 7.51 0.207 2.852 3.059 (0.150) (0.029) (0.179) 10.39 41.10 115,845 0.81 2.34 8.73
1988 10.39 0.212 (0.570) (0.358) (0.202) (0.190) (0.392) 9.64 (3.28) 106,766 0.77 2.27 -
1989 9.64 0.227 2.332 2.559 (0.221) (0.008) (0.229) 11.97 27.02 134,523 0.76 1.94 2.24
1990 11.97 0.314 (1.188) (0.874) (0.206) (0.200) (0.406) 10.69 (7.55) 169,939 0.73 2.74 -
1991 10.69 0.325 2.703 3.028 (0.268) _ (0.268) 13.45 28.65 331,392 0.70 2.58 7.98
1992 13.45 0.229 0.524 0.753 (0.353) (0.150) (0.503) 13.70 5.73 532,971 0.66 2.06 0.81
1993 13.70 0.232 0.575 0.807 (0.189) (0.068) (0.257) 14.25 5.87 560,824 0.64 1.64 1.70
1994 14.25 0.190 0.899 1.089 (0.297) (0.082) (0.379) 14.96 7.63 516,620 0.77 1.23 6.52
1995**** 14.96 .170 4.427 4.597 (.135) (.042) (.177) 19.38 31.11 712,866 .90 1.08 1.39
Class II Shares:
1995+ 16.88 .023 2.427 2.450 - - - 19.33 14.72 4,161 1.79++ 0.37++ 1.39
DynaTech Fund:**
1986 4.75 0.041 0.124 0.165 (0.125) - (0.125) 4.79 3.18 31,834 0.87 0.78 14.58
1987 4.79 0.031 2.292 2.323 (0.033) - (0.033) 7.08 48.60 50,417 0.86 0.48 8.27
1988 7.08 0.040 (1.197) (1.157) (0.033) - (0.033) 5.89 (16.41) 33,575 0.87 0.68 3.68
1989 5.89 0.060 1.719 1.779 (0.039) - (0.039) 7.63 30.26 37,673 0.83 0.90 -
1990 7.63 0.156 (0.352) (0.196) (0.059) (0.605) (0.664) 6.77 (2.71) 36,538 0.79 2.09 11.34
1991 6.77 0.126 1.952 2.078 (0.168) - (0.168) 8.68 31.21 48,867 0.93 1.57 7.12
1992 8.68 0.120 0.522 0.642 (0.112) - (0.112) 9.21 7.29 64,595 0.81 1.42 10.70
1993 9.21 0.102 1.207 1.309 (0.117) (0.112) (0.229) 10.29 14.36 71,469 0.81 1.03 26.56
1994 10.29 0.070 0.210 0.280 (0.124) (0.596) (0.720) 9.85 2.89 67,413 1.00 0.69 9.73
1995 9.85 .118 2.991 3.109 (.049) (.130) (.179) 12.78 32.10 92,987 1.01 1.11 9.84
Utilities Fund:
1986 6.47 0.530 1.768 2.298 (0.555) (0.003) (0.558) 8.21 36.03 326,985 0.74 5.95 3.49
1987 8.21 0.536 (0.455) 0.081 (0.560) (0.011) (0.571) 7.72 0.56 632,474 0.65 6.55 -
1988 7.72 0.553 (0.243) 0.310 (0.570) - (0.570) 7.46 4.03 615,985 0.64 7.36 1.68
1989 7.46 0.548 0.672 1.220 (0.580) - (0.580) 8.10 16.71 652,308 0.62 7.10 4.02
1990 8.10 0.529 (0.555) (0.026) (0.580) (0.014) (0.594) 7.48 (0.93) 749,386 0.60 6.50 2.07
1991 7.48 0.535 1.385 1.920 (0.590) - (0.590) 8.81 26.15 1,226,118 0.59 6.44 0.89
1992 8.81 0.530 0.849 1.379 (0.559) - (0.559) 9.63 15.89 2,191,095 0.57 5.90 1.39
1993 9.63 0.534 1.161 1.695 (0.545) - (0.545) 10.78 17.83 3,626,774 0.55 5.30 7.81
1994 10.78 0.550 (2.436) (1.886) (0.524) (0.040) (0.564) 8.33 (17.94) 2,572,508 0.64 5.76 6.34
1995 8.33 .527 1.424 1.951 (.524) (.007) (.531) 9.75 24.19 2,765,976 .73 5.88 5.55
Class II Shares:
1995+ 8.89 .228 .880 1.108 (.248) - (.248) 9.75 13.01 8,369 1.21++ 5.15++ 5.55
Per Share Operating Performance Ratios/Supplemental Data+++
_____________________________________________________ ___________________________
Net Real- Distri- Distri- Net Ratio of Net
Net Asset Net ized & Un- butions butions Net Asset Assets Ratio of Investment
Year Value Invest-realized Gain TotalFrom From Net From Total Value at End Expenses Income to Portfolio
Ended Beginning ment (Loss)on InvestmentInvestment Realized Distri- at End Total of Year to Average Average Turnover
Sep.30of Year Income Securities Operations Income Capital Gains butions of Year Return**(in 000's)Net Assets Net Assets Rate
Income Fund:
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 $ 2.06 $0.230 $0.238 $0.468 $(0.220) $(0.058) $(0.278) $ 2.25 24.20% $ 226,418 0.71% 9.76% 30.76%
1987 2.25 0.206 0.004 0.210 (0.220) (0.020) (0.240) 2.22 9.08 484,270 0.64 9.20 18.14
1988 2.22 0.228 (0.096) 0.132 (0.220) (0.022) (0.242) 2.11 6.00 726,815 0.61 10.50 10.01
1989 2.11 0.222 0.009 0.231 (0.220) (0.011) (0.231) 2.11 11.16 1,189,694 0.57 10.46 12.05
1990 2.11 0.212 (0.324) (0.112) (0.220) (0.018) (0.238) 1.76 (6.37) 1,299,130 0.55 10.73 12.14
1991 1.76 0.190 0.350 0.540 (0.220) - (0.220) 2.08 32.60 1,673,187 0.56 10.17 33.92
1992 2.08 0.190 0.194 0.384 (0.205) (0.009) (0.214) 2.25 18.80 2,483,501 0.55 9.11 23.30
1993 2.25 0.180 0.227 0.407 (0.185) (0.012) (0.197) 2.46 18.76 3,935,444 0.54 7.84 25.41
1994 2.46 0.170 (0.201) (0.031) (0.180) (0.029) (0.209) 2.22 (1.52) 4,891,505 0.64 7.37 23.37
1995 2.22 .180 .108 .288 (.180) (.028) (.208) 2.30 14.00 5,885,788 .71 8.26 58.64
Class II Shares:
1995+ 2.18 .079 .113 .192 (.072) - (.072) 2.30 8.96 65,822 1.23++ 7.89++ 58.64
U.S. Government Securities Fund:*
1986 7.33 0.790 0.165 0.955 (0.875) - (0.875) 7.41 13.25 14,361,682 0.54 9.93 36.02
1987 7.41 0.698 (0.500) 0.198 (0.724) (0.014) (0.738) 6.87 2.22 13,024,437 0.52 9.49 52.92
1988 6.87 0.691 0.115 0.806 (0.696) - (0.696) 6.98 11.77 12,112,775 0.53 9.85 34.14
1989 6.98 0.688 (0.072) 0.616 (0.696) - (0.696) 6.90 8.95 11,260,310 0.52 9.99 25.70
1990 6.90 0.668 (0.020) 0.648 (0.688) - (0.688) 6.86 9.47 11,143,333 0.52 9.72 18.23
1991 6.86 0.653 0.287 0.940 (0.660) - (0.660) 7.14 13.97 12,426,910 0.52 9.26 22.14
1992 7.14 0.609 0.106 0.715 (0.595) - (0.595) 7.26 10.14 13,617,157 0.53 8.46 38.75
1993 7.26 0.557 (0.056) 0.501 (0.561) - (0.561) 7.20 6.86 14,268,516 0.52 7.71 43.10
1994 7.20 0.500 (0.678) (0.178) (0.512) - (0.512) 6.51 (2.75) 11,668,747 0.55 7.37 18.28
1995 6.51 .497 .348 .845 (.485) - (.485) 6.87 13.56 11,101,605 .61 7.50 5.48
Class II Shares:
1995+ 6.67 .206 .167 .373 (.193) - (.193) 6.85 5.66 11,695 1.18++ 6.48++ 5.48
+For the period May 1, 1995 (effective date) to September 30, 1995.
++Annualized.
+++Ratios for the year ended 1995, Class I and Class II, have been calculated
using the daily average net assets during the period.
*Maturity of U.S. government issues and the reinvestment of the proceeds
thereof are considered as purchases and sales of securities in computing the
portfolio turnover rate.
**Data prior to 1992 has been adjusted to reflect a two-for-one stock split in
the form of a 100% stock dividend to shareholders of record effective on the
beginning of business on June 1, 1992.
***Total return measures the change in value of an investment over the periods
indicated. It is not annualized. It does not include the maximum initial sales
charge or the deferred contingent sales charge. Prior to May 1, 1994, the total
return for Class I shares also assumes reinvestment of dividends at offering
price and capital gains, if any, at net asset value. Effective May 1, 1994, with
the implementation of the Rule 12b-1 distribution plan for Class I shares, the
existing sales charge on reinvested dividends has been eliminated.
****Per share amounts have been calculated using the daily average shares
outstanding during the period.
</TABLE>
WHAT IS THE FUND?
The Fund, which was incorporated under the laws of Delaware in 1947 and
reincorporated under the laws of Maryland in 1979, is an open-end management
investment company commonly called a "mutual fund" and is registered with the
SEC under the Investment Company Act of 1940, as amended (the "1940 Act"). The
Fund has five separate diversified series: Growth Series, DynaTech Series,
Utilities Series, Income Series and U.S. Government Securities Series. The
Growth Series, Utilities Series, Income Series and U.S. Government Securities
Series issue two classes: Growth Series - Class I, Growth Series - Class II,
Utilities Series - Class I, Utilities Series - Class II, Income Series - Class
I, Income Series - Class II, U.S. Government Securities Series - Class I and
U.S. Government Securities Series - Class - II. All Fund shares outstanding
before May 1, 1995, have been redesignated as Class I shares, and will retain
their previous rights and privileges, except for legally required modifications
to shareholder voting procedures, as discussed in "General Information -
Organization and Voting Rights." THE DYNATECH SERIES CURRENTLY DOES NOT OFFER
CLASS II SHARES.
You may purchase shares of each Series (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of Class I shares of a Series is equal to such Series' net asset
value (see "How Are Fund Shares Valued?" in this Prospectus and the SAI) plus a
variable sales charge not exceeding 4.5% or 4.25% of the offering price
depending upon the Series and the amount invested. The current public offering
price of the Class II shares is equal to the net asset value, plus a sales
charge of 1.0% of the amount invested. (See "How Do I Buy Shares?")
HOW DOES THE FUND INVEST ITS ASSETS?
The investment objectives of all Series are fundamental policies and may not be
changed without shareholder approval.
GROWTH SERIES
The primary investment objective of this Series is capital appreciation. The
Series is primarily invested in common stocks or convertible securities believed
to offer favorable possibilities of capital appreciation, but some of which may
yield little or no current income. Current income is only a secondary
consideration in selecting portfolio securities. The assets of the Series may be
held only in cash or cash equivalents, or invested in shares of common or
capital stock traded on any national securities exchange, or issued by a
corporation, association or similar legal entity having gross assets valued by
it at not less than $1,000,000 as shown by its latest published annual report,
or in bonds or preferred stock convertible into shares of common or capital
stock listed for trading on a national securities exchange. The Series may also
write covered call options and purchase put options on securities. Concentration
of investments in a single industry may not exceed 25% of its total assets; this
is a fundamental policy of the Series which may not be changed without
shareholder approval.
DYNATECH SERIES
The investment objective of this Series is capital appreciation. The Series is
designed for investors who understand and are willing to accept the risk of loss
involved in seeking capital appreciation. Investments are made primarily in
companies emphasizing technological development, in fast-growing industries or
in situations which management considers undervalued. The assets of this Series
may be held only in cash or cash equivalents, or invested in securities traded
on any national securities exchange, or issued by a corporation, association or
similar legal entity having gross assets valued by it at not less than
$1,000,000 as shown by its latest published annual report. It is contemplated
that the bulk of this Series' assets will be invested in common stocks,
including securities convertible into common stocks. The Series may also
purchase put options on securities and indices of securities. When the
investment manager believes that no attractive investment opportunities exist,
the Series may maintain a significant portion of its assets in cash. Investments
in debt securities or preferred stocks which management believes will further
the investment objective of the Series may also be made. This Series may not
concentrate more than 25% of its assets in any one industry. From time to time,
through market appreciation of certain issues, concentration in a few issues may
develop. Investments of this Series tend to be of a more speculative nature, and
there can be greater emphasis on short-term trading profits. Investments in
certain instances may be based upon market fluctuations precipitated by
excessive optimism or pessimism of investors with little or no basis in
fundamental economic conditions.
UTILITIES SERIES
The investment objectives of this Series are both capital appreciation and
current income. As a fundamental policy, the assets of the Series may be held in
cash or cash equivalents, or invested in securities of an issuer actually
engaged in the public utilities industry. "Public Utilities Industry" includes
the manufacture, production, generation, transmission and sale of gas, water,
and electricity. As required by the guidelines issued by the SEC, at least 65%
of the investments made by the Utilities Series will be invested in the
securities of an issuer actually engaged in the public utilities industry,
however, under normal circumstances the Series expects to have substantially all
of its assets invested in such securities. The term also includes issuers
engaged in the communications field including entities such as telephone,
cellular, telegraph, satellite, microwave and other companies providing
communication facilities for the public benefit.
To achieve its investment objective, this Series invests primarily in common
stocks, including, from time to time, non-dividend paying common stocks if, in
the opinion of the investment manager, such securities appear to offer
attractive opportunities for capital appreciation. The Series may also invest in
preferred stocks and bonds issued by utility issuers. When purchasing
fixed-income debt securities, the Series may invest in investment grade or lower
grade securities, depending upon prevailing market and economic conditions. The
Series may invest in fixed-income debt securities regardless of their rating
(including securities in the lowest rating categories) or in securities which
are not rated. Although most of the Series' investments are rated at least BBB
by Moody's Investors Service ("Moody's") or Standard & Poor's Corporation
("S&P") (see the Appendix to this Prospectus for a discussion of the ratings),
it is the Series' intent not to purchase fixed-income debt securities rated
below B by rating services. With respect to unrated securities, it is also the
Series' intent to purchase securities which, in the view of the Series'
investment manager would be comparable to securities rated B or above by a
nationally recognized rating service or, if no specific equivalent rating has
been assigned by a nationally recognized rating service, securities which have
been determined to be consistent with the Series' objectives without exposing
the Series to excessive risk. The Series will not purchase issues that are in
default nor will the Series invest in securities which are felt by management to
involve excessive risk. As of September 30, 1995, 9% of the Utilities Series'
assets were invested in debt securities, all of the rated securities were rated
at least Baa by Moody's and BBB by S&P.
Securities rated B are regarded, on balance, as predominantly speculative with
respect to the capacity to pay interest and repay principal in accordance with
the terms of the obligation. These ratings, which represent the opinions of the
rating services with respect to the securities and are not absolute standards of
quality, will be considered in connection with the investment of the Series'
assets but will not be a determining or limiting factor.
Like all bonds, the value of the Series' fixed-income debt investments generally
shares an inverse relationship with market interest rates. For example, when
interest rates rise, the value of the Series' debt investments tends to fall.
Conversely, when market interest rates decline, the value of these securities
tends to rise. Because securities issued by utility companies are particularly
sensitive to movement in interest rates, the equity securities of such companies
are more affected by movement in interest rates than are the equity securities
of other issuers.
The Series has substantial investments in the electric public utilities
industries which have certain characteristics and risks of which investors
should be aware. Such characteristics include: risks associated with regulatory
changes; risks associated with interest rate fluctuations; the difficulty of
obtaining adequate returns on invested capital in spite of frequent rate
increases; the difficulty of financing large construction programs during
inflationary periods; restrictions on operations and increased costs and delays
attributable to environmental considerations; difficulties of the capital
markets in absorbing utility debts and equity securities; difficulties in
obtaining fuel for electric generation at reasonable prices; difficulty in
obtaining natural gas for resale; risks associated with the construction and
operation of nuclear power plants; and general effects of energy conservation.
Historically, this Series' investments in the Public Utilities Industry have
been predominantly in dividend-yielding common stocks.
INCOME SERIES
The investment objective of this Series is to maximize income while maintaining
prospects for capital appreciation. The Series invests in a diversified
portfolio of securities selected with particular consideration of current income
production. The underlying assets of the Series may be held in cash or cash
equivalents, or invested in securities traded on any national securities
exchange or in securities issued by a corporation, association or similar legal
entity having gross assets valued by it at not less than $1,000,000 as shown by
its latest published annual report. This Series may also invest in preferred
stocks. There are no restrictions as to the proportion of investments which may
be made in a particular type of security and such determination is entirely
within management's discretion. A breakdown of the ratings for the bonds in the
Series' portfolio is included under "Asset Composition Table" below.
The Series may invest up to 100% of its portfolio in non-investment grade bonds,
commonly known as "junk bonds," which entail default and other risks greater
than those associated with higher rated securities. Investors should carefully
assess the risks associated with an investment in the Series in light of the
securities in which the Series invests.
Various investment services publish ratings of some of the types of securities
in which the Series may invest. Higher yields are ordinarily available from
securities in the lower-rated categories of the recognized rating services (that
is, securities rated Ba or lower by Moody's, or BB or lower by S&P) or from
unrated securities of comparable quality. A list of these ratings is shown in
the Appendix to this Prospectus. These ratings, which represent the opinions of
the rating services with respect to the issuer's ability to pay interest and
repay principal, although they do not purport to reflect the risk of
fluctuations in market value and are not absolute standards of quality, will be
considered in connection with the investment of the Series' assets, but will not
be a determining or limiting factor. The Series may invest in securities
regardless of their rating (including securities in the lowest rating
categories) or in securities which are not rated, including up to 5% of its
assets in securities which are in default at the time of purchase.
In the event the rating on an issue held in the Series' portfolio is changed by
the rating service or the security goes into default such event will be
considered by the Series in its evaluation of the overall investment merits of
that security but will not generally result in an automatic sale of the
security.
Rather than relying principally on the ratings assigned by the rating services,
the investment analysis of securities being considered for the Series' portfolio
may also include, among other things, consideration of relative values, based on
such factors as anticipated cash flow, interest or dividend coverage, asset
coverage, earnings prospects, the experience and managerial strength of the
issuer, responsiveness to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements and the issuer's changing
financial condition and public recognition thereof. Since a substantial portion
of the Series' portfolio at any particular time may consist of debt securities,
changes in the level of interest rates, among other things, will likely affect
the value of the Series' holdings and thus the value of your investment. Certain
of the high yielding fixed-income securities in which the Series may invest may
be purchased at a discount. Such securities, when held to maturity or retired,
may include an element of capital gain. Capital losses may be realized when
securities purchased at a premium, that is, in excess of their stated or par
value, are held to maturity or are called or redeemed at a price lower than
their purchase price. Capital gains or losses also may be realized upon the sale
of securities.
As market conditions change, it is conceivable that all of the assets of this
Series could be invested in common stocks or, conversely, in debt securities. It
is a fundamental policy of this Series that concentration of investment in a
single industry may not exceed 25% of its total assets.
The Series may purchase debt obligations on a "when-issued" or
"delayed-delivery" basis. Such securities are subject to market fluctuation
prior to delivery to the Fund and generally do not earn interest until their
scheduled delivery date. Therefore, the value or yields at delivery may be more
or less than the value or the yields available when the transaction was entered
into. When the Series is the buyer in such a transaction, it will maintain, in a
segregated account with its custodian, cash or high-grade marketable securities
having an aggregate value equal to the amount of such purchase commitments until
payment is made. To the extent the Income Series engages in when-issued and
delayed delivery transactions, it will do so only for the purpose of acquiring
portfolio securities consistent with the Series' investment objectives and
policies, and not for the purpose of investment leverage. (See "How Does the
Fund Invest Its Assets? - When-Issued, Delayed Delivery and TBA Transactions" in
the Fund's SAI for a more complete discussion regarding when-issued and
delayed-delivery transactions.)
The Series may also purchase certain bonds issued at discount which defer the
payment of interest or which pay no interest until maturity, known as zero
coupon bonds, or which pay interest through issuance of additional bonds, known
as pay-in-kind bonds. See "What Are the Potential Risks Relating to High Yield
Securities?" for more information regarding these types of bonds.
The Series' total return for Class I, as calculated pursuant to the formula
prescribed by the SEC, for the one-, five- and ten-year periods ended on
September 30, 1995 was 9.09%, 15.28% and 12.02%, respectively. See "How Does
the Fund Measure Performance?"
ASSET COMPOSITION TABLE
A credit rating by a rating agency evaluates only the safety of principal and
interest of a bond, and does not consider the market value risk associated with
an investment in such a bond. The table below shows the percentage of the Income
Series' assets invested in fixed-income securities rated in each of the specific
rating categories shown and those that are not rated by the rating agency but
deemed by the investment manager to be of comparable credit quality. The
information was prepared based on a dollar weighted average of the Income
Series' portfolio composition based on month-end assets for each of the 12
months in the fiscal year ended September 30, 1995. The Appendix to this
Prospectus includes a description of each rating category.
MOODY'S RATING PERCENTAGE OF ASSETS
- -------------- --------------------
Aaa 9.59%
Aa 1.70%
A 0.01%
Baa 7.29%
Ba 4.55%
B 21.57%
Caa 5.58%*
Ca 0.77%
*1.55% of these securities which are unrated by ratings services have been
included in the Caa category.
U.S. GOVERNMENT SECURITIES SERIES
The investment objective of the U.S. Government Securities Series is income
through investment in a portfolio limited to securities which are obligations
of the U.S. government or its instrumentalities. U.S. government securities
include, but are not limited to, U.S. Treasury bonds, notes and bills,
Treasury certificates of indebtedness and securities issued by
instrumentalities of the U.S. government. Other than investments in
short-term U.S. Treasury securities or assets held in cash pending
investment, the assets of this Series are currently invested solely in
obligations ("GNMAs" or "Ginnie Maes") of the Government National Mortgage
Association ("Association").
The U.S. Government Series believes that its investment policies, as stated in
this Prospectus and the SAI, make the Series a permissible investment for
federal credit unions, based on the Series' understanding of the laws and
regulations governing credit union regulations as of September 30, 1995. CREDIT
UNION INVESTORS ARE ADVISED TO CONSULT THEIR OWN LEGAL ADVISERS TO DETERMINE
WHETHER AND TO WHAT EXTENT THE SHARES OF THE U.S. GOVERNMENT SECURITIES SERIES
CONSTITUTE LEGAL INVESTMENTS FOR THEM. Please see the SAI ("How Does the Fund
Invest It's Assets? - Credit Union Investment Regulations") for details.
INFORMATION ABOUT GNMAS
GNMAs are mortgage-backed securities representing part ownership of a pool of
mortgage loans. GNMAs differ from other bonds in that principal may be paid back
on an unscheduled basis rather than returned in a lump sum at maturity. The
Series will purchase GNMAs for which principal and interest are guaranteed. The
Series also purchases "adjustable rate" GNMAs and may also purchase other types
of securities which may be issued with the Association's guarantee.
The Association's guarantee of payment of principal and interest on GNMAs is
backed by the full faith and credit of the United States Government. The
Association may borrow U.S. Treasury funds to the extent needed to make payments
under its guarantee. Of course, this guarantee does not extend to the market
value or yield of the GNMAs or the net asset value or performance of the Series,
which will fluctuate daily with market conditions.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment which represents a return of principal will be reinvested by the
Series in securities which may bear interest at a rate higher or lower than the
obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, such principal payments are passed through to the GNMA
holders, such as the Series. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of such variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. Government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. In a period of declining interest rates, however,
it is more likely that mortgages contained in GNMA pools will be prepaid, thus
reducing the effective yield. This potential for prepayment during periods of
declining interest rates may reduce the general upward price increases of GNMAs
as compared to the increases experienced by noncallable debt securities over the
same periods. Moreover, any premium paid on the purchase of a GNMA will be lost
if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by the Series will have a direct impact on the net asset value
per share of the Series.
The Series' investments are continually monitored and changes are made as market
conditions warrant. However, the Series does not engage in the trading of
securities for the purpose of realizing short-term profits.
THE PRICE PER SHARE THE SHAREHOLDER RECEIVES ON REDEMPTION MAY BE MORE OR LESS
THAN THE PRICE PAID FOR THE SHARES. THE DIVIDENDS PER SHARE PAID BY THE SERIES
MAY ALSO VARY.
OTHER INVESTMENT POLICIES OF THE FUND
TO-BE-ANNOUNCED AND DELAYED DELIVERY TRANSACTIONS. The U.S. Government
Securities Series may purchase and sell GNMA Certificates on a "To-Be-Announced"
("TBA") and "delayed delivery" basis. These transactions are arrangements under
which the Series may purchase securities with payment and delivery scheduled for
a future time up to 60 days after purchase. The transactions are subject to
market fluctuation and are subject to the risk that the value or yields at
delivery may be more or less than the purchase price or the yields available
when the transaction was entered into. In TBA and delayed delivery transactions,
the Series relies on the seller to complete the transaction. The other party's
failure to do so may cause the Series to miss a price or yield considered
advantageous. Securities purchased on a TBA or delayed delivery basis do not
generally earn interest until their scheduled delivery date. The Series is not
subject to any percentage limit on the amount of its assets which may be
invested in delayed delivery and TBA purchase obligations. More information
concerning these transactions is included in the SAI.
OPTIONS. Each Series, except the U.S. Government Securities Series, may write
covered call options which are listed for trading on a national securities
exchange. This means that the Series will only write options on securities which
it actually owns. A call option gives the person who buys it the right to buy
the security on which the option is written for a specified period of time for a
price agreed to at the time the Series sells the option, even though that price
may be less than the value of the security at the time the option is exercised.
When the Series sells covered call options, it will receive a cash premium which
can be used in whatever way is felt to be most beneficial to the Series. The
risks associated with covered call writing are that in the event of a price rise
on the underlying security which would likely trigger the exercise of the call
option, the Series will not participate in the increase in price beyond the
exercise price. If the Series determines that it does not wish to deliver the
underlying securities from its portfolio, it would have to enter into a "closing
purchase transaction" the premium on which may be higher or lower than that
received by the Series for writing the option. There is no assurance that a
closing purchase transaction will be available in every instance. Transactions
in options are generally considered "derivative securities." The U.S. Government
Securities Series does not engage in option transactions.
The Growth, DynaTech, and Utilities Series may purchase put options. Put options
on particular securities may be purchased to protect against a decline in the
market value of the underlying security below the exercise price less the
premium paid for the option. A put option gives the holder the right to sell the
underlying security at the option exercise price at any time during the option
period. The ability to purchase put options will allow a Series to protect the
unrealized gain in an appreciated security in its portfolio without actually
selling the security. In addition, the Series will continue to receive interest
or dividend income on the security. The Series may sell a put option which it
has previously purchased prior to the sale of the securities underlying such
option. Such sales will result in a net gain or loss, depending on whether the
amount received on the sale is more or less than the premium and other
transaction costs paid for the put option that is sold. Such gain or loss may be
wholly or partially offset by a change in the value of the underlying security
which the Series owns or has the right to acquire. The risk associated with put
buying is if the value of the underlying security exceeds the exercise price (or
never declines below the exercise price), the Series may suffer a loss equal to
the amount of the premium it paid plus transaction costs. The Series' investment
in options may be limited by the requirements of the Internal Revenue Code of
1986, as amended, ("Code") for qualification as a regulated investment company
and are subject to special tax rules that may affect the amount, timing and
character of distributions to shareholders. These securities require the
application of complex and special rules and elections, more information about
which is included in the SAI.
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
of Directors and subject to the following conditions, each Series, except the
U.S. Government Securities Series, may lend its portfolio securities to
qualified securities dealers or other institutional investors, provided that
such loans do not exceed 10% of the value of a Series' total assets at the time
of the most recent loan. The borrower must deposit with the Fund's custodian
collateral with an initial market value of at least 102% of the initial market
value of the securities loaned, including any accrued interest, with the value
of the collateral and loaned securities marked-to-market daily to maintain
collateral coverage of at least 100%. Such collateral shall consist of cash,
securities issued by the U.S. Government, its agencies or instrumentalities, or
irrevocable letters of credit. The lending of securities is a common practice in
the securities industry. The Series may engage in security loan arrangements
with the primary objective of increasing a Series' income either through
investing the cash collateral in short-term interest bearing obligations or by
receiving a loan premium from the borrower. Under the securities loan agreement,
a Series continues to be entitled to all dividends or interest on any loaned
securities. As with any extension of credit, there are risks of delay in
recovery and loss of rights in the collateral should the borrower of the
security fail financially. The Fund's Income and Utilities Series loaned
securities to certain brokers during the fiscal year ended September 30, 1995.
CONVERTIBLE SECURITIES. Each Series, except the U.S. Government Securities
Series, may invest in debt obligations and preferred stocks which are
convertible within a specified period of time into a certain quantity of the
common stock of the same or a different issuer. A convertible security may be
called by the issuer but only after a specified date and under certain
circumstances established at the time the security is issued. Convertible
securities provide a fixed-income stream and the opportunity, through their
conversion feature, to participate in any capital appreciation resulting from a
market price advance in the convertible security's underlying common stock.
Holders of a convertible security will have recourse only to the issuer of the
security which will be either an operating company or an investment bank.
Because convertible securities have features of both common stocks and
fixed-income securities, their value can be influenced by both interest rate and
market movements. As with a fixed-income security, a convertible security tends
to increase in market value when interest rates decline and decrease in value
when interest rates rise. The price of a convertible security is also influenced
by the market value of the security's underlying common stock and tends to
increase as the market value of the underlying stock rises, whereas it tends to
decrease as the market value of the underlying stock declines.
When issued by an operating company, a convertible security tends to be senior
to common stock, but at the same time is often subordinate to other types of
fixed-income securities issued by the respective company. When convertible
securities issued by operating companies are converted, the operating company
typically issues new common stock to the holder of the security. However, if the
security is called by the issuer and the parity price of the convertible
security is less than the call price, the operating company will often pay cash
out instead of common stock. If the security is issued by an investment bank,
the security is an obligation of and is also convertible through such investment
bank.
The convertible debt obligations in which the Series may invest are subject to
the same rating criteria as that Series' investments in fixed-income securities.
In both cases the Series may invest in securities rated investment grade (i.e.,
securities rated in one of the top four categories by S&P or Moody's) or below,
or in unrated securities deemed to be of comparable quality by the Series'
investment manager. However, unlike convertible debt obligations, convertible
preferred stocks are equity securities. Like common stocks, preferred stocks are
subordinated to all debt obligations in the event of insolvency, and an issuer's
failure to make a dividend payment is generally not an event of default
entitling the preferred shareholder to take action. Preferred stocks generally
have no maturity date, and they pay dividends, rather than interest payments.
For more information on convertible securities, including enhanced convertible
securities and liquidity matters regarding these securities, please see the SAI.
TRADE CLAIMS. The Income Series may invest up to 5% of its assets in trade
claims. Trade claims are purchased from creditors of companies in financial
difficulty. For purchasers such as the Series, trade claims offer the potential
for profits since they are often purchased at a significantly discounted value
and, consequently, may generate capital appreciation in the event that the value
of the claim increases as the debtor's financial position improves. In the event
that the debtor is able to pay the full obligation on the face of the claim as a
result of a restructuring or an improvement in the debtor's financial condition,
trade claims offer the potential for higher income due to the difference in the
face value of the claim as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. Trading in claims is not regulated by federal
securities laws or the SEC. Currently, trading in claims is regulated primarily
by bankruptcy laws. Because trade claims are unsecured holders of trade claims
may have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding. In light of the nature and risk of trade claims, the
Series' investment in these instruments will not exceed 5% of its net assets at
time of acquisition.
LOAN PARTICIPATIONS. The Income Series may invest up to 5% of its assets in loan
participations and other related direct or indirect bank obligations ("Loan
Participations"). These instruments are interests in floating or variable rate
senior loans to U.S. corporations, partnerships and other entities. While Loan
Participations generally trade at par value the Income Series will be able to
acquire Loan Participations, including those which sell at a discount because of
the borrower's credit problems. To the extent the borrower's credit problems are
resolved, the Loan Participation may appreciate in value. The investment manager
may acquire Loan Participations for the Series when it believes that over the
long term, appreciation will take place. An investment in such securities,
however, carries substantially the same risk as that for defaulted debt
securities and may cause the loss of the entire investment to the Series. Most
Loan Participations are illiquid and, to that extent, will be included in the
10% limitation described under "Illiquid Investments."
REPURCHASE AGREEMENTS. All Series of the Fund, except for the U.S. Government
Securities Series, may engage in repurchase transactions in which a Series
purchases a U.S. government security subject to resale to a bank or dealer at an
agreed-upon price and date. The transaction requires the collateralization of
the seller's obligation by the transfer of securities with an initial market
value, including accrued interest, equal to at least 102% of the dollar amount
invested by the Series in each agreement, with the value of the underlying
security marked to market daily to maintain coverage of at least 100%. A default
by the seller might cause the Series to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. The Series
might also incur disposition costs in liquidating the collateral. The Series,
however, intend to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Series under the 1940 Act. The U.S. government security subject to resale
(the collateral) will be held on behalf of a Series by a custodian approved by
the Fund's Board and will be held pursuant to a written agreement.
BORROWING. The Series do not borrow money or mortgage or pledge any of their
assets, except that each Series may borrow for temporary or emergency purposes
in an amount up to 5% of total asset value.
ILLIQUID INVESTMENTS. It is the policy of all Series that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Series has valued the
securities) may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Series. Subject to this limitation, the
Fund's Board of Directors has authorized each Series, except the U.S. Government
Securities Series, to invest in restricted securities where such investment is
consistent with the Series' investment objective and has authorized such
securities to be considered to be liquid to the extent the investment manager
determines on a daily basis that there is a liquid institutional or other market
for such securities. Notwithstanding the investment manager's determinations in
this regard, the Fund's Board of Directors will remain responsible for such
determinations and will consider appropriate action, consistent with the
objective and policies of the Series holding such security, if the security
should become illiquid subsequent to its purchase. To the extent a Series
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the Series may be increased if qualified institutional buyers
become uninterested in purchasing these securities or the market for these
securities contracts. See "How Does the Fund Invest It's Assets? " in the SAI.
FOREIGN SECURITIES. Securities of foreign issuers cannot be purchased for the
U.S. Government Securities Series. The Income Series may invest up to 25% of its
assets in foreign securities, providing such investments are consistent with its
objective and comply with its concentration and diversification policies. There
are no restrictions on investment of the assets of the other Series in foreign
securities, providing such in and diversification policies of such Series. The
Series, other than the Income Series, presently have no intention of investing
more than 10% of the net assets of any Series in foreign securities not publicly
traded in the United States. The holding of foreign securities, however, may be
limited by the Series to avoid investment in certain Passive Foreign Investment
Companies ("PFIC") and the imposition of a PFIC tax on the Fund resulting from
such investments.
The Series will ordinarily purchase foreign securities which are traded in the
United States or purchase American Depositary Receipts ("ADRs"), which are
certificates issued by U.S. banks representing the right to receive securities
of a foreign issuer deposited with that bank or a correspondent bank. However,
the Series may purchase the securities of foreign issuers directly in foreign
markets.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and other tax laws and laws limiting the amount and types of
foreign investments. Changes of governmental administrations or of economic or
monetary policies, in the U.S. or abroad, or changed circumstances in dealings
between nations or currency convertibility or exchange rates could result in
investment losses for such Series.
Investment in the shares of foreign issuers requires consideration of certain
factors that are not normally involved in investments solely in U.S. issuers.
Among other things, the financial and economic policies of some foreign
countries in which the Fund may invest are not as stable as in the U.S.
Furthermore, foreign issuers are not generally subject to uniform accounting,
auditing and financial standards and requirements comparable to those applicable
to U.S. corporate issuers. There may also be less government supervision and
regulation of foreign securities exchanges, brokers and issuers than exist in
the U.S. Restrictions and controls on investment in the securities markets of
some countries may have an adverse effect on the availability and costs to the
Series of investments in those countries. In addition, there may be the
possibility of expropriations, foreign withholding taxes, confiscatory taxation,
political, economic or social instability or diplomatic developments which could
affect assets of the Series invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers. Some
foreign securities markets have substantially less volume than the New York
Stock Exchange (the "Exchange") and some foreign government securities may be
less liquid and more volatile than U.S. government securities. Transaction costs
on foreign securities exchanges may be higher than in the U.S., and foreign
securities settlements may, in some instances, be subject to delays and related
administrative uncertainties.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities which are acquired by a Series outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Series to be an illiquid asset so
long as the Series acquires and holds the security with the intention of
reselling the security in the foreign trading market, the Series reasonably
believes it can readily dispose of the security for cash in the U.S. or foreign
market and current market quotations are readily available. Foreign exchange
gains and losses realized by a Series in connection with transactions involving
foreign currencies, foreign currency payables or receivables, and foreign
currency-denominated debt securities are subject to special tax rules which may
cause such gains and losses to be treated as ordinary income and losses rather
than capital gains and losses and may affect the amount and timing of the Series
income or loss from such transactions and in turn its distributions to
shareholders. These rules are discussed in the SAI.
All Series are subject to a number of additional investment restrictions, some
of which may be changed only with the approval of the affected Series'
shareholders, which limits its activities to some extent. For a list of these
restrictions and more information concerning the policies discussed herein,
please see the SAI. There is, of course, no assurance that the Series'
investment objectives described above will be met.
HOW SHAREHOLDERS PARTICIPATE
IN THE RESULTS OF THE FUND'S ACTIVITIES
The assets of each Series are invested in portfolio securities. If the
securities owned by that Series increase in value, the value of the shares of
the Series which you own will increase. If the securities owned by a Series
decrease in value, the value of your shares will also decline. In this way, you
participate in any change in the value of the securities owned by the Series.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Series
shares will fluctuate with movements in the broader equity and bond markets, as
well.
To the extent a Series' investments consist of debt securities, changes in
interest rates will affect the value of a Series' portfolio and thus its share
price. Increased rates of interest which frequently accompany higher inflation
and/or a growing economy are likely to have a negative effect on the value of a
Series' shares. To the extent the Series' investments consist of common stocks,
a decline in the market, expressed for example by a drop in the Dow Jones
Industrials or the Standard & Poor's 500 average or any other equity based
index, may also be reflected in declines in that Series' share price. History
reflects both increases and decreases in the prevailing rate of interest and in
the valuation of the market, and these may reoccur unpredictably in the future.
A decline in the stock market of any country in which a Series is invested may
also be reflected in declines in the Series' share price. Changes in currency
valuations will also affect the price of a Series shares. History reflects both
decreases and increases in worldwide stock markets and currency valuations, and
these may reoccur unpredictably in the future.
WHAT ARE THE POTENTIAL RISKS
RELATING TO HIGH YIELD SECURITIES
As previously indicated, the Income Series intends to invest a substantial
portion of its assets in lower rated, fixed-income securities and unrated
securities of comparable quality.
Corporate debt securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The investment manager will consider both credit risk and
market risk in making investment decisions as to corporate debt obligations for
the Fund.
Bonds rated BB or below by S&P or Ba or below by Moody's (or comparable unrated
securities) are considered by S&P and Moody's, on balance, to be speculative and
questionable as to payment of principal and interest thereon. They will
generally involve more credit risk than securities in the higher rating
categories. Because of the Income Series' policy of investing in higher
yielding, higher risk securities, an investment in the Fund is accompanied by a
higher degree of risk than is present with an investment in higher rated, lower
yielding securities. Accordingly, an investment in the Series should not be
considered a complete investment program and should be carefully evaluated for
its appropriateness in light of your overall investment needs and goals. If you
are on a fixed income or retired, you should also consider the increased risk of
loss to principal which is present with an investment in higher risk securities
such as those in which the Series invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tend to reflect individual
developments affecting the issuer to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower rated securities also tend to be more sensitive to
economic conditions than higher rated securities. These lower rated fixed-income
securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even bonds rated BBB by S&P or Baa by Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of such issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, such issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. As of September 30, 1995, 3
issues (from 3 separate issuers) out of 205 issues (excluding short-term
securities and cash equivalents) in the Series' portfolio were in default. In
the fiscal year ended September 30, 1995, 3 issues defaulted, and a total of 14
issues defaulted over the prior three years, of which the Series still holds the
3 issues mentioned above. Defaulted issues represented 0.70% of the net assets
of the Series at September 30, 1995. Current prices for defaulted bonds are
generally significantly lower than their purchase price, and the Series may have
unrealized losses on such defaulted securities which are reflected in the price
of the Series' shares. In general, securities which default lose much of their
value in the time period prior to the actual default so that the Series' net
assets are impacted prior to the default. The Series may retain an issue which
has defaulted because such issue may present an opportunity for subsequent price
recovery.
High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the securities from the Income
Series. Although such securities are typically not callable for a period from
three to five years after their issuance, if a call were exercised by the issuer
during periods of declining interest rates, the Income Series would likely have
to replace such called securities with lower yielding securities, thus
decreasing the net investment income to the Income Series and dividends to
shareholders. The premature disposition of a high yielding security due to a
call or buy-back feature, the deterioration of the issuer's creditworthiness, or
a default may also make it more difficult for the Income Series to manage the
timing of its receipt of income, which may have tax implications. The Series may
be required under the Code and U.S. Treasury regulations to accrue income for
income tax purposes on defaulted obligations and to distribute such income to
the Series' shareholders even though the Series is not currently receiving
interest or principal payments on such obligations. In order to generate cash to
satisfy any or all of these distribution requirements, the Series may be
required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Series shares.
The Income Series may have difficulty disposing of certain high yielding
securities because there may be a thin trading market for a particular security
at any given time. The market for lower rated, fixed-income securities generally
tends to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent the secondary trading market for
a particular high yielding, fixed-income security does exist, it is generally
not as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Series' ability to dispose of particular issues, when necessary, to meet the
Series' liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Series to obtain market quotations based on actual trades for purposes of
valuing the Series' portfolio. Current values for these high yield issues are
obtained from pricing services and/or a limited number of dealers and may be
based upon factors other than actual sales. (See "How are Fund Shares Valued?"
in this Prospectus and in the SAI.)
The Series is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many recent high yielding securities have
been sold with registration rights, covenants and penalty provisions for delayed
registration, if the Series is required to sell such restricted securities
before the securities have been registered, it may be deemed an underwriter of
such securities as defined in the Securities Act of 1933, which entails special
responsibilities and liabilities. The Income Series may incur special costs in
disposing of such securities; however, the Series will generally incur no costs
when the issuer is responsible for registering the securities.
The Series may acquire high yielding, fixed-income securities during an initial
underwriting. Such securities involve special risks because they are new issues.
The Series has no arrangement with its underwriters or any other person
concerning the acquisition of such securities, and the investment manager will
carefully review the credit and other characteristics pertinent to such new
issues.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recent recession disrupted the
market for high yielding securities and adversely affected the value of
outstanding securities and the ability of issuers of such securities to meet
their obligations. Those adverse effects may continue even as the economy
recovers. Factors adversely impacting the market value of high yielding
securities will adversely impact the Series' net asset value. For example,
adverse publicity regarding lower rated bonds, which appeared during 1989 and
1990, along with highly publicized defaults of some high yield issuers, and
concerns regarding a sluggish economy which continued in 1993, depressed the
prices for many such securities. In addition, the Series may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal or interest on its portfolio holdings. The Series will rely
on the investment manager's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, the investment manager will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The credit risk factors pertaining to lower rated securities also apply to
lower-rated zero coupon, deferred interest and pay-in-kind bonds. Such bonds
carry an additional risk in that, unlike bonds which pay interest throughout the
period to maturity, the Series will realize no cash until the cash payment date
and, if the issuer defaults, the Series may obtain no return at all on its
investment. The Series may be required under the Code and Treasury Regulations
to accrue income for income tax purposes on defaulted obligations and to
distribute such income to the Series' shareholders even though the Series is not
currently receiving interest or principal payments on such obligations. In order
to generate cash to satisfy any or all of these distribution requirements, the
Series may be required to dispose of portfolio securities that it otherwise
would have continued to hold or to use cash flows from other sources such as the
sale of Fund shares. Zero coupon, deferred interest and pay-in-kind bonds
involve additional special considerations.
Zero coupon or deferred interest securities are debt obligations which do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero coupon security
report as income each year the portion of the original issue discount on such
security that accrues that year, even though the holder receives no cash
payments of interest during the year.
Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. The Series will be deemed to receive interest over the life of
such bonds and be treated as if interest were paid on a current basis for
federal income tax purposes, although no cash interest payments are received by
the Series until the cash payment date or until the bonds mature. Accordingly,
during periods when the Series receives no cash interest payments on its zero
coupon securities or deferred interest or pay-in-kind bonds, it may be required
to dispose of portfolio securities to meet the distribution requirements and
such sales may be subject to the risk factors discussed above. The Series is not
limited in the amount of its assets that may be invested in such securities.
Further information is included under "How Taxation Affects You and the Fund."
WHO MANAGES THE FUND?
The Board of Directors (the "Board") has the primary responsibility for the
overall management of the Fund and for electing the officers of the Fund who are
responsible for administering the day-to-day operations of each Series.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should later arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares of the Growth Series, Utilities Series, Income
Series, U.S. Government Securities Series, and one class of the DynaTech Series,
but new classes may be offered in the future.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly-owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries (the "Franklin Templeton Group"). Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(116 separate series) with aggregate assets of over $77 billion.
The team responsible for the day-to-day management of each Series' portfolio is
listed under "Who Runs the Fund?"
Pursuant to the management agreement, the Manager supervises and implements each
Series' investment activities and provides certain administrative services and
facilities which are necessary to conduct the Series' business. The management
fees and total operating expenses of the Class I shares for each Series,
expressed as a percentage of average monthly net assets, for the fiscal year
ended September 30, 1995 were as follows:
U.S.
GOVERN-
DYNA- MENT
GROWTH TECH UTILITIES INCOME SECURITIES
FISCAL YEAR 9/30/95 SERIES SERIES SERIES SERIES SERIES
Management Fees 0.50% 0.63% 0.46% 0.46% 0.45%
Total Operating
Expenses 0.90% 1.01% 0.73% 0.71% 0.61%
----- ----- ----- ----- -----
The management fees and total operating expenses of the Class II shares for each
Series, expressed as a percentage of average monthly net assets, for the fiscal
year ended September 30, 1995 were as follows:
U.S.
GOVERN-
MENT
GROWTH UTILITIES INCOME SECURITIES
FISCAL YEAR 9/30/95 SERIES SERIES SERIES SERIES
Management Fees 0.50% 0.46% 0.46% 0.45%
Total Operating
Expenses 1.70% 1.26% 1.23% 1.18%
----- ----- ----- -----
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in each Series'
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. It is not anticipated that the U.S. Government
Securities Series will incur a significant amount of brokerage expenses because
municipal securities are generally traded in principal transactions that involve
the receipt by the broker of a spread between the bid and ask prices for the
securities and not the receipt of commissions. Further information is included
under "How Does the Fund Purchase Securities For Its Portfolios?" in the SAI.
Shareholder accounting and many of the clerical functions for each Series are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent") in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
PLANS OF DISTRIBUTION
A separate plan of distribution has been approved and adopted for each class of
each Series ("Class I Plans" and "Class II Plans," respectively, or "Plans")
pursuant to Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each
class of each Series are based solely on the distribution and, with respect to
the Class II Plan, servicing fees attributable to that particular class of such
Series. Under either plan, the portion of fees remaining after payment to
securities dealers or others for distribution or servicing may be paid to
Distributors for routine ongoing promotion and distribution expenses incurred
with respect to such class of each Series' shares. Such expenses may include,
but are not limited to, the printing of prospectuses and reports used for sales
purposes, expenses of preparing and distributing sales literature and related
expenses, advertisements, and other distribution-related expenses, including a
prorated portion of Distributors' overhead expenses attributable to the
distribution of shares of each Series.
The maximum amount which a Series may reimburse to Distributors or others under
the Class I Plans for such distribution expenses is 0.25% per annum of Class I's
average daily net assets for the Growth Series and DynaTech Series and 0.15% per
annum of Class I's average daily net assets for the Utilities Series, Income
Series and U.S. Government Securities Series, payable on a quarterly basis. All
expenses of distribution in excess of 0.25% per annum for the Growth Series and
DynaTech Series and 0.15% per annum for the Utilities Series, Income Series and
U.S. Government Securities Series will be borne by Distributors, or others who
have incurred them, without reimbursement from such Series.
Under the Class II Plans, the Growth Series pays to Distributors distribution
and related expenses up to 0.75% per annum of its Class II shares' daily net
assets and the Utilities Series, Income Series, and U.S. Government Securities
Series pays to Distributors distribution and related expenses up to 0.50% per
annum of each Series' Class II daily net assets, payable quarterly. All expenses
of distribution, marketing and related services over that amount will be borne
by Distributors or others who have incurred them, without reimbursement by the
Series. In addition, the Class II Plans provides for an additional payment of up
to 0.25% by the Growth Series and of up to 0.15% by the Utilities Series, Income
Series and U.S. Government Securities Series per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Series on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the purchase price of Class II shares to securities
dealers who initiate and are responsible for such purchases. During the first
year following such purchases, Distributors will retain a portion of Class II's
Rule 12b-1 fees attributable to such shares equal to 0.75% per annum of the
Class II's average daily net assets for the Growth Series and 0.50% per annum of
Class II's average daily net assets for Utilities Series, Income Series and U.S.
Government Securities Series to partially recoup fees Distributors pays to
securities dealers who initiate and are responsible for purchases of Class II
shares.
Both Plans cover any payments to or by the Series, Advisers, Distributors, or
other parties on behalf of the Series, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by a Series within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of a Series. For more
information, including a discussion of the Board's policies with regard to the
amount of The Class I Plan's fees, please "The Fund's Underwriter" in the SAI.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
You may receive two types of distributions from each Series:
1. INCOME DIVIDENDS. Each Series receives income in the form of dividends,
interest and other income derived from its investments. This income, less the
expenses incurred in the Series' operations, is its net investment income from
which income dividends may be distributed. Thus, the amount of dividends paid
per share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. Each Series may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by a Series derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Series as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to a Series'
shareholders. A Series may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
DISTRIBUTIONS TO EACH CLASS OF SHARES
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares of
each Series. The per share amount of any income dividends will generally differ
only to the extent that each class of each Series is subject to different Rule
12b-1 fees.
DISTRIBUTION DATE
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
in the U.S. Government Securities Series and Income Series for shareholders of
record on the last business day of the month, payable on or about the 15th day
of the following month. Each of the foregoing Series may determine to defer the
December 31 record date to a date shortly thereafter in January for tax or other
operational reasons. Dividends on the Utilities Series are generally declared
quarterly and those for Growth and DynaTech are generally declared annually.
The amount of income dividend payments by any Series is dependent upon the
amount of net income received by the Series from its portfolio holdings, is not
guaranteed and is subject to the discretion of the Board. Fund shares are quoted
ex-dividend on the first business day following the record date. The Series do
not pay "interest" or guarantees any fixed rate of return on an investment in
their shares.
In order to be entitled to a dividend, an investor must have acquired the shares
of a Series prior to the close of business on the record date. An investor
considering purchasing shares of a Series shortly before the record date of a
distribution should be aware that because the value of a Series' shares is based
directly on the amount of its net assets, rather than on the principle of supply
and demand, any distribution of income or capital gain will result in a decrease
in the value of the shares of the Series equal to the amount of the
distribution. While a dividend or capital gain distribution received shortly
after purchasing shares represents, in effect, a return of a portion of your
investment, it may be taxable as dividend income or capital gain.
DISTRIBUTION OPTIONS
You may choose to receive your distributions from the Series in any of these
ways:
1.....Purchase additional shares of the Series - You may purchase additional
shares of the same class of the Series (without a sales charge or imposition of
a contingent deferred sales charge) by reinvesting capital gain distributions,
or both dividend and capital gain distributions. If you are a Class II
shareholder, you may also reinvest your distributions in Class I shares of the
Series. This is a convenient way to accumulate additional shares and maintain or
increase your earnings base.
2.....Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase Class I shares of another Franklin Templeton Fund.
Many shareholders find this a convenient way to diversify their investments.
3.....Receive distributions in cash - You may choose to receive dividends, or
both dividend and capital gain distributions in cash. You may have the money
sent directly to you, to another person, or to a checking account. If you choose
to send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE SAME CLASS OF
THE SERIES. You may change the distribution option selected at any time by
notifying the Series by mail or by telephone. Please allow at least seven days
prior to the record date for the Series to process the new option.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. Additional information on tax matters
relating to the Fund and its shareholders is included in the section entitled
"Additional Information Regarding Taxation" in the SAI.
Each Series is treated as a separate entity for federal income tax purposes.
Each Series intends to continue to qualify for treatment as a regulated
investment company under Subchapter M of the Code.
By distributing all of its income and by meeting certain other requirements
relating to the sources of its income and diversification of its assets, each
Series will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from any of the Series, as well as any distributions derived from the
excess of net short-term capital gain over net long-term capital loss, are
treated as ordinary income whether the shareholder has elected to receive them
in cash or in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned shares of the Series and regardless of
whether such distributions are received in cash or in additional shares.
For the fiscal year ended September 30, 1995, the following amounts of income
dividends may qualify for the federal corporate dividends-received deduction:
INCOME DIVIDEND
FUND QUALIFYING
Growth Series 99.88%
DynaTech Series 41.32%
Utilities Series 90.73%
Income Series 27.99%
The above percentages are subject to certain holding period and debt-financing
restrictions imposed under the Code on the corporation claiming the deduction.
These restrictions are discussed in the SAI. None of the distributions paid by
the U.S. Government Securities Series for the fiscal year ended September 30,
1995, qualified for the corporate dividends-received deduction, and it is not
anticipated that any of the current year's dividends will qualify.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
you until the following January, will be treated for tax purposes as if paid by
the Series and received by you on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of the shares for a Series are taxable events on which
you may realize a gain or loss. Any loss incurred on sale or exchange of a
Series' shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by a fund from direct obligations of the U.S.
government, subject in some states to minimum investment requirements that must
be met by each Series. Investments in GNMA securities do not generally qualify
for tax-free treatment. At the end of each calendar year, each Series will
provide shareholders with the percentage of any dividends paid which may qualify
for such tax-free treatment. You should consult with your own tax advisers with
respect to the application of your state and local income tax laws to these
distributions.
The Series will inform you of the source of your dividends and distributions at
the time they are paid and will, promptly after the close of each calendar year,
advise you of the tax status for federal income tax purposes of such dividends
and distributions.
If you are not a U.S. person, for purposes of federal income taxation, you
should consult with your financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by you from a
Series and the application of foreign tax laws to these distributions.
You should also consult your tax advisors with respect to the applicability of
any state and local intangible property or income taxes to your shares of a
Series and distributions and redemption proceeds received from such Series.
HOW DO I BUY SHARES?
Shares of each Series of the Fund are continuously offered through securities
dealers which execute an agreement with Distributors. The use of the term
"securities dealer" shall include other financial institutions which either
directly or through affiliates, have an agreement with Distributors to handle
customer orders and accounts with each Series of the pursuant to Fund. Such
reference, however, is for convenience only and does not indicate a legal
conclusion of capacity. The minimum initial investment in each Series is $100
and subsequent investments must be $25 or more. These minimums may be waived
when the shares are purchased through plans established by the Franklin
Templeton Group. The Fund and Distributors reserve the right to refuse any order
for the purchase of shares. The DynaTech and Growth Series currently do not
permit investment by market timing or allocation services ("Timing Accounts"),
which generally include accounts administered so as to redeem or purchase shares
based upon certain predetermined market indicators.
DIFFERENCES BETWEEN CLASS I AND CLASS II. Class I and Class II shares differ in
the amount of their front-end sales charges and Rule 12b-1 fees, as well as the
circumstances under which the contingent deferred sales charge applies.
Generally, Class I shares have higher front-end sales charges than Class II
shares and comparatively lower Rule 12b-1 fees. Voting rights of each class will
be the same on matters affecting the Series as a whole, but each class will vote
separately on matters affecting only shareholders of that class. See "General
Information - Organization and Voting Rights."
CLASS I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights, and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and may be purchased at a reduced front-end
sales charges or at net asset value if certain conditions are met. In most
circumstances, contingent deferred sales charges will not be assessed against
redemptions of Class I shares. Class I shares of the Growth Series and DynaTech
Series are subject to Rule 12b-1 fees of up to a maximum of 0.25% per annum of
average daily net assets of such shares and Class I shares of the Utilities
Series, Income Series, and U.S. Government Securities Series are subject to Rule
12b-1 fees of up to a maximum of 0.15% per annum of average daily net assets of
such shares. See " Who Manages the Fund?" and "How Do I Sell Shares?" for more
information.
CLASS II. Class II shares are also subject to a front-end sales charge of 1% of
the amount invested and a contingent deferred sales charge of 1.0% if shares are
redeemed within 18 months of the calendar month of purchase. In addition, Class
II shares of the Growth Series are subject to Rule 12b-1 fees of up to a maximum
of 1.00% and the Utilities Series, Income Series, and U.S. Government Securities
Series are subject to Rule 12b-1 fees of up to a maximum of .65% per annum of
average daily net assets of such shares, a portion of which will be retained by
Distributors during the first year of investment (0.75% for the Growth Series
and .50% for the Utilities Series, Income Series, and U.S. Government Securities
Series). THE DYNATECH SERIES CURRENTLY DOES NOT OFFER CLASS II SHARES.
DECIDING WHICH CLASS OF GROWTH SERIES, UTILITIES SERIES, INCOME SERIES OR
U.S. GOVERNMENT SECURITIES SERIES TO PURCHASE
You should carefully evaluate your anticipated investment amount and time
horizon prior to determining which class of shares to purchase. Generally, if
you expect to invest less than $100,000 in the Franklin Templeton Funds and to
make substantial redemptions within approximately six years or less of
investment, you should consider purchasing Class II shares. However, the higher
annual Rule 12b-1 fees on Class II shares will result in higher operating
expenses (which will accumulate over time to outweigh the difference in
front-end sales charges) and lower income dividends for Class II shares. For
this reason, Class I shares may be more attractive to you if you plan to invest
in the Series over the long-term, even if no sales charge reductions are
available to you.
If you qualify to purchase Class I shares at reduced sales charges, you should
seriously consider purchasing Class I shares, especially if you intend to hold
your shares approximately six years or more. If you qualify to purchase Class I
shares at reduced sales charges but intend to hold your shares less than
approximately six years, you should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. IF YOU ARE
INVESTING $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO PURCHASE
CLASS I SHARES AT NET ASSET VALUE, YOU MAY NOT PURCHASE CLASS II SHARES. See
"Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when shares may be purchased at net asset
value.
Each class of the Series represents the same interest in the investment
portfolio of such Series and has the same rights, except that each class has a
different front-end sales charge, bears the separate expenses of its Rule 12b-1
distribution plan, and has exclusive voting rights with respect to such plan.
The two classes also have separate exchange privileges.
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to you. Such purchases, however, may be
subject to a contingent deferred sales charge. You may exceed $1 million in
Class II shares by cumulative purchases over a period of time. If you intend to
make investments exceeding $1 million, however, you should consider purchasing
Class I shares through a Letter of Intent instead of purchasing Class II shares.
Each class has a separate schedule for compensating securities dealers for
selling shares. You should take all of the factors regarding an investment in
each class into account before deciding which class of shares to purchase. There
are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
WHEN PLACING PURCHASE ORDERS, YOU SHOULD CLEARLY INDICATE WHICH CLASS OF SHARES
YOU INTEND TO PURCHASE. A PURCHASE ORDER THAT FAILS TO SPECIFY A CLASS WILL
AUTOMATICALLY BE INVESTED IN CLASS I SHARES.
Shares of both classes of the Series of the Fund are offered at their respective
public offering prices, which are determined by adding the net asset value per
share plus a front-end sales charge, next computed (1) after your securities
dealer receives the order which is promptly transmitted to the Series or (2)
after receipt of an order by mail from you directly in proper form (which
generally means a completed Shareholder Application accompanied by a negotiable
check).
CLASS I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "How Are Fund Shares Valued?"
Set forth below are tables showing front-end sales and dealer concessions for
Class I shares of each Series.
TOTAL SALES CHARGE
DEALER
AS A CONCESSION
GROWTH AND DYNATECH AS A PERCENTAGE AS A
SERIES PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*
----------------- ----- -------- ------
Less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than
$250,000 3.75% 3.90% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.25% 2.30% 2.00%
$1,000,000 or more none none (see below)**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. Securities
dealers who receive 90% or more of a sales commission may be deemed to be an
underwriter under the Securities Act of 1933, as amended.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 1% on sales of $1 million but less than $2 million, plus
0.80% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50 million but less
than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
TOTAL SALES CHARGE
INCOME, UTILITIES AND DEALER
U.S. GOVERNMENT AS A CONCESSION
SECURITIES AS A PERCENTAGE AS A
SERIES PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*
----------------- ----- -------- ------
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more none none (see below)**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages set forth above. At the discretion of
Distributors, all sales charges may at times be allowed to the securities
dealer. Securities dealers who receive 90% or more of a sales commission may be
deemed to be an underwriter under the Securities Act of 1933, as amended.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of all
or a portion of investment of $1 million within the contingency period. See "How
Do I Sell Shares? - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of the your
current purchase plus the cost or current value (whichever is higher) of a your
existing investments in one or more of the funds in the Franklin Group of
Funds(R) and the Templeton Group of Funds. Included for these aggregation
purposes are (a) the mutual funds in the Franklin Group of Funds except Franklin
Valuemark Funds and Franklin Government Securities Trust (the "Franklin Funds"),
(b) other investment products underwritten by Distributors or its affiliates and
(c) the U.S. registered mutual funds in the Templeton Group of Funds except
Templeton Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and
Templeton Variable Products Series Fund (the "Templeton Funds"). Franklin Funds
and Templeton Funds are collectively referred to as the "Franklin Templeton
Funds." Sales charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective only after
notification to Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers. Either Distributors or one of its
affiliates may make payments, out of its own resources, of up to 0.75% of the
amount purchased in the Utilities Series, Income Series, and U.S. Government
Securities Series and up to 1% of the amount purchased in the Growth Series and
DynaTech Series to securities dealers who initiate and are responsible for
purchases made at net asset value by non-designated retirement plans, and up to
1% of the amount purchased in all funds to securities dealers who initiate and
are responsible for purchases made at net asset value by certain designated
retirement plans (excluding IRA and IRA rollovers), certain trust companies and
trust departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more. See "Description of
Special Net Asset Value Purchases" below and "How Do I Buy and Sell Shares?" in
the SAI.
Class II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase.
The DynaTech Series currently does not offer Class II shares. See table below:
CLASS II - TOTAL SALES CHARGE
DEALER
AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*
any amount (less than
$1 million) 1.00% 1.01% 1.00%
*Either Distributors or one of its affiliates may make additional payments to
securities dealers, our of its own resources, of up to 1% of the amount
invested. During the first year following a purchase of Class II shares,
Distributors will keep a portion of the Rule 12b-1 fees assessed to those shares
to partially recoup fees Distributors pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
Either Distributors or one of its affiliates out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by any Series of the Fund or
its shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI under "How Do I Buy and Sell Shares?".
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included under "Officers and Directors"
in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES -
CLASS I SHARES ONLY
Class I shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales charge,
you or your securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of your spouse, children under
the age of 21 and grandchildren under the age of 21. The value of Class II
shares you own may also be included for this purpose.
In addition, an investment in Class I shares of each Series may qualify for a
reduction in the sales charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined
with the amount of the current purchase in determining the sales charge to be
paid.
2. LETTER OF INTENT. You may immediately qualify for a reduced sales charge on a
purchase of Class I shares by completing the Letter of Intent section of the
Shareholder Application (the "Letter"). By completing the Letter, you (i)
expresses an intention to invest during the next 13 months a specified amount
which, if made at one time, would qualify for a reduced sales charge (ii) to
Distributors a security interest in the reserved shares discussed below, and
(iii) irrevocably appoint Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or all shares for the purpose of
paying any additional sales charge due. Purchases under the Letter will conform
with the requirements of Rule 22d-1 under the 1940 Act. You or your securities
dealer must inform Investor Services or Distributors that this Letter is in
effect each time a purchase is made.
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING PROVISIONS BY COMPLETING THE LETTER
OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%) of the
amount of the total intended purchase will be reserved in Class I shares
registered in the your name, to assure that the full applicable sales charge
will be paid if the intended purchase is not completed. The reserved shares will
be included in the total shares owned as reflected on periodic statements.
Income and capital gain distributions on the reserved shares will be paid as you
have directed. You will not be able to dispose of the reserved shares until the
Letter has been completed or the higher sales charge paid. This policy of
reserving shares does not apply to certain benefit plans described under
"Description of Special Net Asset Value Purchases." For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares you own may be included in determining a
reduced sales charge to be paid on Class I shares pursuant to the Letter of
Intent and Rights of Accumulation programs.
GROUP PURCHASES OF CLASS I SHARES
If you are a member of a qualified group, you may purchase Class I shares of a
Series at the reduced sales charge applicable to the group as a whole. The sales
charge is based upon the aggregate dollar value of shares previously purchased
and still owned by the members of the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and still
held $80,000 of shares in a Series and now were investing $25,000, the sales
charge would be 3.75% for the Growth and DynaTech Series and 3.50% for the
Income, Utilities and U.S. Government Securities Series. Information concerning
the current sales charge applicable to a group may be obtained by contacting
Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount, and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If you select a payroll deduction plan, subsequent investments will be automatic
and will continue until such time as you notify the Fund and your employer to
discontinue further investments. Due to the varying procedures used to prepare,
process and forward the payroll deduction information to the Fund, there may be
a delay between the time of the payroll deduction and the time the money reaches
the Fund. The investment in a Series of the Fund will be made at the offering
price per share determined on the day that both the check and payroll deduction
data are received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors, and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares with or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment account only; (6) current employees of securities dealers and their
family members, in accordance with the internal policies and procedures of the
employing securities dealer; (7) insurance company separate accounts for pension
plan contracts; and (8) shareholders of Templeton Institutional Funds, Inc.
reinvesting redemption proceeds from that fund under an employee benefit plan
qualified under Section 401 of the Code, in shares of the Fund.
For either Class I or Class II, the same class of shares of a Series of the Fund
may be purchased at net asset value by persons who have redeemed, within the
previous 365 days, their shares of the Fund or another of the Franklin Templeton
Funds which were purchased with a front-end sales charge or assessed a
contingent deferred sales charge on redemption. If a different class of shares
is purchased, the full front-end sales charge must be paid at the time of
purchase of the new shares. Under this privilege, you may reinvest an amount not
exceeding the redemption proceeds. While credit will be given for any contingent
deferred sales charge paid on the shares redeemed and subsequently repurchased,
a new contingency period will begin. Matured shares will be reinvested at net
asset value and will not be subject to a new contingent deferred sales charge.
Shares of a Series of the Fund redeemed in connection with an exchange into
another fund (see "What If My Investment Outlook Changes? - Exchange Privilege")
are not considered "redeemed" for this privilege. In order to exercise this
privilege, a written order for the purchase of shares of a Series must be
received by the Series or the Series' Shareholder Services Agent within 365 days
after the redemption. The 365 days, however, do not begin to run on redemption
proceeds placed immediately after redemption in a Franklin Bank Certificate of
Deposit ("CD") until the CD (including any rollover) matures. Reinvestment at
net asset value may also be handled by a securities dealer or other financial
institution, who may charge you a fee for this service. The redemption is a
taxable transaction but reinvestment without a sales charge may affect the
amount of gain or loss recognized and the tax basis of the shares reinvested. If
there has been a loss on the redemption, the loss may be disallowed if a
reinvestment in the same fund is made within a 30-day period. Information
regarding the possible tax consequences of such a reinvestment is included in
the tax section of this Prospectus and under "Additional Information Regarding
Taxation" in the SAI.
For either Class I or Class II, the same class of shares of a Series of the Fund
or of another of the Franklin Templeton Funds may be purchased at net asset
value and without a contingent deferred sales charge by persons who have
received dividends and capital gain distributions from investments in that class
of shares of a Series of the Fund within 365 days of the payment date of such
distribution. Class II shareholders may also direct such distributions for
investment at net asset value in a Class I Franklin Templeton Fund. To exercise
this privilege, a written request to reinvest the distribution must accompany
the purchase order. Additional information may be obtained from Shareholder
Services at 1-800/632-2301. See "Distributions Options" under "What
Distributions Might I Receive from the Fund?"
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has investment objectives similar to
those of the Series.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by anyone who has taken a distribution from
an existing retirement plan already invested in the Franklin Templeton Funds
(including former participants of the Franklin Templeton Profit Sharing 401(k)
plan), to the extent of such distribution. In order to exercise this privilege a
written order for the purchase of shares of the Series must be received by
Franklin Templeton Trust Company (the "Trust Company"), the Series or the Fund's
Shareholder Services Agent within 365 days after the plan distribution.
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Series is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF A SERIES CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
any Series of the Fund should consult with expert counsel to determine the
effect, if any, of various payments made by the Series or its investment manager
on arbitrage rebate calculations. In connection with investments by eligible
governmental authorities at net asset value made through a securities dealer who
has executed a dealer agreement with Distributors, either Distributors or one of
its affiliates may make a payment, out of its own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact the
Franklin Templeton Institutional Services Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13-month period in a Series of the Fund or
in any of the Franklin Templeton Investments totals at least $1,000,000.
Employee benefit plans not designated above or qualified under Section 401 of
the Code ("non-designated plans") may be afforded the same privilege if they
meet the above requirements as well as the uniform criteria for qualified groups
previously described under "Group Purchases," which enable Distributors to
realize economies of scale in its sales efforts and sales related expenses.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to the
amount to be purchased, which may be established by Distributors. Currently,
those criteria require that the amount invested or to be invested during the
subsequent 13-month period in the Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trustees or other fiduciaries purchasing
securities for certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without regard to where such
assets are currently invested.
Please see "How Do I Buy and Sell Shares?" in the SAI for further information
regarding net asset value purchases of Class I shares.
HOW DO I BUY SHARES IN CONNECTION WITH TAX-DEFERRED RETIREMENT PLANS?
Shares of each Series may be used for individual or employer-sponsored
retirement plans involving tax-deferred investments. Each Series may be used as
an investment vehicle for an existing retirement plan, or the Trust Company may
provide the plan documents and serve as custodian or trustee. A plan document
must be adopted in order for a retirement plan to be in existence.
Trust Company, an affiliate of Distributors, can serve as custodian or trustee
for retirement plans. Brochures for the Trust Company plans contain important
information regarding eligibility, contribution and deferral limits and
distribution requirements. Please note that an application other than the one
contained in this Prospectus must be used to establish a retirement plan account
with the Trust Company. To obtain a retirement plan brochure or application,
call 1-800/DIAL BEN (1-800/342-5236).
Please see "How Do I Sell Shares?" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.
GENERAL
Securities laws of states in which the Series' shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Series shares may be required to register as dealers
pursuant to state law.
WHAT PROGRAMS AND PRIVILEGES ARE
AVAILABLE TO ME AS A SHAREHOLDER?
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM A SERIES IF YOUR SHARES ARE HELD, OF RECORD, BY A
FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED ACCOUNT THROUGH
THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE "REGISTERING YOUR
ACCOUNT" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in the your name on the books of each Series of the Fund,
without the issuance of a share certificate. Maintaining shares in
uncertificated form (also known as "plan balance") minimizes the risk of loss or
theft of a share certificate. A lost, stolen or destroyed certificate cannot be
replaced without obtaining a sufficient indemnity bond. The cost of such a bond,
which is generally borne by you, can be 2% or more of the value of the lost,
stolen or destroyed certificate. A certificate will be issued if requested by
you or your securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to you quarterly for a Series paying
dividends on a quarterly or more frequent basis to reflect the dividends
reinvested during that period and after each dividend for a Series paying
dividends less frequently than quarterly and after each other transaction which
affects the your account. This statement will also show the total number of
shares you own, including the number of shares in "plan balance" for your
account.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan offers a convenient way to invest in the Series of
the Fund. Under the plan, you can arrange to have money transferred
automatically from your checking account to the Series each month to purchase
additional shares. If you are interested in this program, please refer to the
Automatic Investment Plan Application at the back of this Prospectus for the
requirements of the program or contact your investment representative. Of
course, the market value of the Series' shares may fluctuate and a systematic
investment plan such as this will not assure a profit or protect against a loss.
You may terminate the program at any time by notifying Investor Services by mail
or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Series will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the
Series. This is especially likely to occur if there is a market decline. If a
withdrawal amount exceeds the value of your account, your account will be closed
and the remaining balance in your account will be sent to you. Redemptions under
a Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Series of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Series may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Series
receives notification of the shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
You may choose to have distributions from the Series or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares
of the Series available to institutional accounts. For further information,
contact the Franklin Templeton Institutional Services Department at
1-800/321-8563.
WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, a Series' shares may be exchanged
for the same class of shares of other Franklin Templeton Funds which are
eligible for sale in your state of residence and in conformity with such fund's
stated eligibility requirements and investment minimums. Some funds, however,
may not offer Class II shares. Class I shares may be exchanged for Class I
shares of any of the other Franklin Templeton Funds. Class II shares may be
exchanged for Class II shares of any of the other Franklin Templeton Funds. No
exchanges between different classes of shares will be allowed. A contingent
deferred sales charge will not be imposed on exchanges. If, however, the
exchanged shares were subject to a contingent deferred sales charge in the
original fund purchased and shares are subsequently redeemed within the
contingency period, a contingent deferred sales charge will be imposed. Before
making an exchange, you should review the prospectus of the fund you wish to
exchange from and the fund you wish to exchange into for all specific
requirements or limitations on exercising the exchange privilege, for example,
limitations on a fund's sale of its shares, minimum holding periods for
exchanges at net asset value, or applicable sales charges.
You may exchange shares in any of the following ways:
BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
BY TELEPHONE
YOU OR YOUR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE SHARES OF
A SERIES BY CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF YOU DO NOT
WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND
OR INVESTOR SERVICES SHOULD BE NOTIFIED.
The telephone exchange privilege allows you to effect exchanges from the Series
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS(R)
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of a Series' shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class of a Series which were purchased without a sales charge will be charged a
sales charge in accordance with the terms of the prospectus of the fund and the
class of shares being purchased, unless the original investment in the Franklin
Templeton Funds was made pursuant to the privilege permitting purchases at net
asset value, as discussed under "How Do I Buy Shares?". Exchanges of Class I
shares of a Series which were purchased with a lower sales charge into a fund
which has a higher sales charge will be charged the difference, unless the
shares were held in the Series for at least six months prior to executing the
exchange.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be transferred to
the account in the fund being exchanged into and will be invested at net asset
value. Because the exchange is considered a redemption and purchase of shares,
you may realize a gain or loss for federal income tax purposes. Backup
withholding and information reporting may also apply. Information regarding the
possible tax consequences of such an exchange is included in the tax section in
this Prospectus and under "Additional Information Regarding Taxation" in the
SAI.
If a substantial portion of a Series' shareholders should, within a short
period, elect to redeem their shares of that Series pursuant to the exchange
privilege, the Series might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of each
Series to initially invest this money in short-term, interest-bearing money
market instruments, unless it is felt that attractive investment opportunities
consistent with the Series' investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Series at any time
upon 60 days' written notice to shareholders.
EXCHANGES OF CLASS I SHARES
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares of the Fund - Contingent
Deferred Sales Charge" for a discussion of investments subject to a contingent
deferred sales charge.
EXCHANGES OF CLASS II SHARES
When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares, and you exchange $3,000 into a new fund, $500 will be exchanged from
free shares, $1,000 from matured shares, and $1,500 from CDSC liable shares.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago, and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may you purchase shares of Money Fund II directly. Class II shares
exchanged for shares of Money Fund II will continue to age and a contingent
deferred sales charge will be assessed if CDSC liable shares are redeemed. No
other money market funds are available for Class II shareholders for exchange
purposes. Class I shares may be exchanged for shares of any of the money market
funds in the Franklin Templeton Funds except Money Fund II. Draft writing
privileges and direct purchases are allowed on these other money market funds as
described in their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a contingent deferred sales charge. The proportional method is
believed by management to more closely meet and reflect the expectations of
Class II shareholders in the event shares are redeemed during the contingency
period. For federal income tax purposes, the cost basis of shares redeemed or
exchanged is determined under the Code without regard to the method of
transferring shares chosen by the Fund.
The DynaTech Series does not currently offer Class II shares.
RETIREMENT PLAN ACCOUNTS
Franklin Templeton IRA and 403(b) retirement plan accounts may accomplish
exchanges directly. Certain restrictions may apply, however, to other types
of retirement plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
exchange shares based on predetermined market indicators ("Timing Accounts")
will be charged a $5.00 administrative service fee per each such exchange.
All other exchanges are without charge.
The Growth Series and DynaTech Series currently will not accept investments from
Timing Accounts.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Board of Directors has determined to prohibit new investments from Timing
Accounts which intend to use the DynaTech and Growth Series. In addition, the
Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of a Series within two weeks of an earlier exchange request
out of that Series, or (ii) makes more than two exchanges out of a Series per
calendar quarter, or (iii) exchanges shares equal in value to at least $5
million, or more than 1% of the Series' net assets. Accounts under common
ownership or control, including accounts administered so as to redeem or
purchase shares based upon certain predetermined market indicators, will be
aggregated for purposes of the exchange limits.
Each Series reserves the right to refuse the purchase side of an exchange
request by any Timing Account, person, or group if, in the Manager's judgment,
the Series would be unable to invest effectively in accordance with its
investment objectives and policies, or would otherwise potentially be adversely
affected. A shareholder's purchase exchanges may be restricted or refused if the
Series receives or anticipates simultaneous orders affecting significant
portions of the Series' assets. In particular, a pattern of exchanges that
coincide with a "market timing" strategy may be disruptive to the Series and
therefore may be refused.
The Fund and Distributors, as indicated under "How Do I Buy Shares?" reserve the
right to refuse any order for the purchase of shares.
TRANSFERS
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
CONVERSION RIGHTS
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
HOW DO I SELL SHARES?
You may liquidate your shares at any time and receive from the Series the value
of the shares. You may redeem shares in any of the following ways:
BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Series the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) next computed after the
written request in proper form is received by Investor Services. Redemption
requests received after the time at which the net asset value is calculated will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the New York
Stock Exchange (the "Exchange") (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. You are requested to provide a telephone
number where you may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact you promptly when necessary
will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURES MUST BE GUARANTEED IF THE REDEMPTION
REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000;
or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signature guaranteed as referenced above. You are advised,
for your own protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation, and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and the applicable
state law since these accounts have varying requirements, depending upon the
state of residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
BY TELEPHONE
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." YOU MAY OBTAIN
ADDITIONAL INFORMATION ABOUT TELEPHONE REDEMPTIONS BY WRITING TO THE FUND OR
INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY CALLING
1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES
TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. YOU, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with a Series or Investor
Services may be made for up to $50,000 per day per Series account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record. Redemption requests by telephone will not be accepted within 30 days
following an address change by telephone. In that case, you should follow the
other redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities, which qualify to purchase shares at net asset value
pursuant to the terms of this Prospectus) which wish to execute redemptions in
excess of $50,000 must complete an Institutional Telephone Privileges Agreement
which is available from the Franklin Templeton Institutional Services Department
by telephoning 1-800/321-8563.
THROUGH SECURITIES DEALERS
Each Series will accept redemption orders from securities dealers who have
entered into an agreement with Distributors. This is known as a repurchase. The
only difference between a normal redemption and a repurchase is that if you
redeem shares through a dealer, the redemption price will be the net asset value
next calculated after your dealer receives the order which is promptly
transmitted to a Series, rather than on the day the Series receives your written
request in proper form. The documents described under "Redemptions by Mail"
above, as well as a signed letter of instruction, are required regardless of
whether you redeem shares directly or submit such shares to a securities dealer
for repurchase. Your letter should reference the Series and the class, the
account number, the fact that the repurchase was ordered by a dealer and the
dealer's name. Details of the dealer-ordered trade, such as trade date,
confirmation number, and the amount of shares or dollars, will help speed
processing of the redemption. The seven-day period within which the proceeds of
your redemption will be sent will begin when the Series receives all documents
required to complete ("settle") the repurchase in proper form. The redemption
proceeds will not earn dividends or interest during the time between receipt of
the dealer's repurchase order and the date the redemption is processed upon
receipt of all documents necessary to settle the repurchase. Thus, it is in your
best interest to have the required documentation completed and forwarded to the
Series as soon as possible. Your dealer may charge a fee for handling the order.
See "How Do I Buy and Sell Shares?" in the SAI for more information on the
redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first in, first out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions to participants or
their beneficiaries in Trust Company individual retirement plan accounts due to
death, disability or attainment of age 59 1/2; tax-free returns of excess
contributions from employee benefit plans; distributions from employee benefit
plans, including those due to termination or plan transfer; redemptions
initiated by a Series due to an account falling below the minimum specified
account size; redemptions following the death of the shareholder or beneficial
owner; and redemptions through a Systematic Withdrawal Plan set up for shares
prior to February 1, 1995, and for Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's net asset value (3%
quarterly, 6% semiannually or 12% annually). For example, if a Class I account
maintained an annual balance of $1,000,000, only $120,000 could be withdrawn
through a once-yearly Systematic Withdrawal Plan free of charge. Any amount over
that $120,000 would be assessed a 1% contingent deferred sales charge. Likewise,
if a Class II account maintained an annual balance of $10,000, only $1,200 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests of redemptions of a SPECIFIED DOLLAR
amount, will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a SPECIFIC
NUMBER of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
Each Series may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase shares of a Series, which may
take up to 15 days or more. Although the use of a certified or cashier's check
will generally reduce this delay, shares purchased with these checks will also
be held pending clearance. Shares purchased by federal funds wire are available
for immediate redemption.
The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested, depending on
fluctuations in the market value of securities owned by a Series.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
OTHER INFORMATION
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
For any information required about a proposed liquidation, a shareholder may
call Franklin's Shareholder Services Department or the securities dealer may
call Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer shares of a
Series in one account to another identically registered account in the Series,
and (iv) request the issuance of certificates (to be sent to the address of
record only), (v) exchange shares of a Series as described in this Prospectus by
telephone. In addition, if you complete and file an Agreement as described under
"How Do I Sell Shares? - Redemptions by Telephone" you will be able to redeem
shares of a Series.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and distribution option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any redemption or distribution
payment. While the telephone exchange privilege is extended to Franklin
Templeton IRA and 403(b) retirement accounts, certain restrictions may apply to
other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plans Specialist at 1-800/527-2020.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
HOW ARE FUND SHARES VALUED?
The net asset value per share of each class of a Series is determined separately
as of the scheduled close of the Exchange (generally 1:00 p.m. Pacific time)
each day that the Exchange is open for trading. Many newspapers carry daily
quotations of the prior trading day's closing "bid" (net asset value) and "ask"
(offering price, which includes the maximum front-end sales charge of each class
of shares of each Series).
The net asset value per share of each class of a Series is determined by
deducting the aggregate gross value of all liabilities of each class from the
aggregate gross value of all assets of each class, and then dividing the
difference by the number of shares of the respective class of a Series
outstanding. Assets in the Series' portfolios are valued as described under "How
Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of a Series except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of a Series will be
computed on a pro rata basis based on the proportionate participation in the
Series represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, you may obtain
Class I and Class II account information, current price and, if available, yield
or other performance information, specific to the Fund or any Franklin Templeton
Fund. In addition, Class I shareholders may process an exchange, within the same
class, into an identically registered Franklin account and request duplicate
confirmation or year-end statements and deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 106 for Growth Series - Class I, 206 for Growth Series -
Class II, 108 for DynaTech Series - Class I, 107 for Utilities Series - Class I,
207 for Utilities Series - Class II, 109 for Income Series - Class I, 209 for
Income Series - Class II, 110 for U.S. Government Securities Series - Class I,
and 210 for U.S. Government Securities Series - Class II followed by the # sign.
The system's automated operator will prompt you with easy to follow step-by-step
instructions from the main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone:
HOURS OF OPERATION
(MONDAY THROUGH
DEPARTMENT NAME TELEPHONE NO. FRIDAY)
Shareholder Services 1-800/632-2301 5:30a.m. to 5:00p.m.
Dealer Services 1-800/524-4040 5:30a.m. to 5:00p.m.
Fund Information 1-800/DIAL BEN 5:30a.m. to 5:00p.m.
8:30a.m. to 5:00p.m.
(Saturday)
Retirement Plans 1-800/527-0637 5:30a.m. to 5:00p.m.
TDD (hearing impaired) 1-800/851-0637 5:30a.m. to 5:00p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
HOW DOES THE FUND MEASURE PERFORMANCE?
Advertisements, sales literature and communications to you may contain several
measures of a class of a Series' performance, including current yield, various
expressions of total return, and current distribution rate. They may also
occasionally cite statistics to reflect the Series' volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Series may also furnish total return quotations for each of their classes
for other periods or based on investments at various sales charge levels or at
net asset value. For such purposes, total return equals the total of all income
and capital gain paid to shareholders, assuming reinvestment of all
distributions, plus (or minus) the change in the value of the original
investment, expressed as a percentage of the purchase price.
Current yield for each class of a Series reflects the income per share earned by
the Series' portfolio investments. It is calculated for each class of a Series
by dividing that class' net investment income per share during a recent 30-day
period by the maximum public offering price for that class of shares on the last
day of that period and annualizing the result.
Yield for each class of a Series, which is calculated according to a formula
prescribed by the SEC (see the SAI), is not indicative of the dividends or
distributions which were or will be paid to shareholders of any Series.
Dividends or distributions paid to shareholders of a class of a Series are
reflected in the current distribution rate, which may be quoted to shareholders.
The current distribution rate is computed by dividing the total amount of
dividends per share paid by a class of a Series during the past 12 months by a
current maximum offering price. Under certain circumstances, such as when there
has been a change in the amount of dividend payout, or a fundamental change in
investment policies, it might be appropriate to annualize the dividends paid
during the period such policies were in effect, rather than using the dividends
during the past 12 months. The current distribution rate differs from the
current yield computation because it may include distributions to shareholders
from sources other than dividends and interest, such as premium income from
option writing and short-term capital gain, and is calculated over a different
period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class of a Series' income and will assume the
payment of the maximum sales charge on the purchase of that class of shares.
When there has been a change in the sales charge structure, the historical
performance figures will be restated to reflect the new rate. The investment
results of each class of a Series, like all other investment companies, will
fluctuate over time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what a class of the
Series' total return, current yield, or distribution rate may be in any future
period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends September 30. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and under "General Information" in the SAI.
ORGANIZATION AND VOTING RIGHTS
The Fund's authorized capital stock consists of fourteen billion shares of
Capital Stock of $0.01 par value which have been authorized by the Board of
Directors to be issued in ten separate sub-classes: 250,000,000 shares
designated as Growth Series - Class I shares, 250,000,000 shares designated as
Growth Series - Class II shares, 2,500,000,000 shares as U.S. Government
Securities - Class I, 2,500,000,000 shares as U.S. Government Securities Series
- - Class II shares, 3,600,000,000 shares as Income Series - Class I shares,
3,600,000,000 as Income Series - Class II shares, 400,000,000 shares as
Utilities Series - Class I shares, 400,000,000 shares as Utilities Series -
Class II shares, 250,000,000 shares as DynaTech Series - Class I, and
250,000,000 as DynaTech Series - Class II shares. The Board of Directors is
empowered by the Charter to issue other Series of Capital Stock and to increase
or decrease the number, but not below that at the time outstanding.
The assets of the Fund received for the issue or sale of each Series of the
Capital Stock and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are especially allocated to such Series, and
constitute the underlying assets of such Series. The underlying assets of each
Series are required to be segregated on the books of account and are to be
charged with the liabilities in respect to such Series and with a share of the
general liabilities of the Fund. Liabilities in respect to any two or more
Series are to be allocated in proportion to the asset value of the respective
Series except where direct expenses can otherwise be fairly allocated. The Board
of Directors has the right to determine which liabilities are allocable to a
given Series and which are general or allocable to two or more Series. In the
event of the dissolution or liquidation of the Fund, the registered holders of
the Capital Stock of any Series are entitled to receive as a class the
underlying assets of such Series available for distribution to shareholders.
Shares of Capital Stock entitle their holders to one vote per share; however,
votes are made by Series on matters affecting an individual Series. Shares of
the Fund have noncumulative voting rights which means that in all elections of
directors, the holders of more than 50% of the shares voting can elect 100% of
the directors if they choose to do so, and in such event, the holders of the
remaining shares voting will not be able to elect any person or persons to the
Board of Directors. Shares have no preemptive or subscription rights, and are
fully transferable. There are no conversion rights; however, holders of shares
of any series may reinvest all or any portion of the proceeds from the
redemption or repurchase of such shares into shares of any other series as
described under "Exchange Privilege."
Shares of each class of a Series represent proportionate interests in the assets
of the Series and have the same voting and other rights and preferences as the
other classes and Series of the Fund for matters that affect the Fund as a
whole. For matters that only affect a certain class of a Series' shares,
however, only shareholders of that class will be entitled to vote. Therefore
each class of shares of a Series will vote separately on matters (1) affecting
only that class of such Series, (2) expressly required to be voted on separately
by class by state corporation law, or (3) required to be voted on separately by
the 1940 Act, or the rules adopted thereunder. For instance, if a change to the
Rule 12b-1 plan relating to Class I shares of a Series requires shareholder
approval, only shareholders of Class I of that Series may vote on the change to
the Rule 12b-1 plan affecting that class. Similarly, if a change to the Rule
12b-1 plan relating to Class II shares requires approval, only shareholders of
Class II of such Series may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of a Series, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
MEETINGS OF SHAREHOLDERS
Maryland General Corporation Law does not require corporations registered as
management investment companies under the 1940 Act to hold routine annual
meetings of shareholders and the Fund does not intend to hold such routine
annual meetings. The Fund may, however, hold a meeting for such purposes as
changing fundamental investment restrictions, approving a new management
agreement or any other matters which are required to be acted on by shareholders
under the 1940 Act.
A meeting may also be called by shareholders holding at least 10% of the shares
entitled to vote at the meeting for the purpose of voting upon the removal of
directors, in which case shareholders may receive assistance in communicating
with other shareholders in connection with the election or removal of directors
such as that provided in Section 16(c) of the 1940 Act. In addition, Maryland
General Corporation Law provides that a special meeting may be called by a
majority of the Board of Directors or by the written request of shareholders
holding at least 25% of the shares entitled to vote at the meeting.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem, at net asset value, your shares if your
account in any Series of the Fund has a value of less than $50, but only where
the value of your account has been reduced by your prior voluntary redemption of
shares and has been inactive (except for the reinvestment of distributions) for
a period of at least six months, provided advance notice is given to you. For
more information, see "How Do I Buy and Sell Shares? in the SAI.
OTHER INFORMATION
The Fund believes that the U.S. Government Securities Series is generally a
permissible investment for national banks, federally chartered savings and loan
associations, federally chartered credit unions and the Fishing Vessel Capital
Construction Fund. Such investors should confirm the permissibility of proposed
investments in this Series with their counsel.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
REGISTERING YOUR ACCOUNT
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealer to evidence consent to the
transfer. Under current procedures the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. In the future it may be
possible to effect such transfers electronically through the services of the
NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, the
investor will be deemed to have authorized the use of electronic instructions on
the account, including, without limitation, those initiated through the services
of the NSCC, to have adopted as instruction and signature any such electronic
instructions received by the Fund and Investor Services, and to have authorized
them to execute the instructions without further inquiry. At the present time,
such services which are available include the NSCC's "Networking," "Fund/SERV,"
and "ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the Internal Revenue Service ("IRS") any taxable dividend, capital
gain distribution, or other reportable payment (including share redemption
proceeds) and withhold 31% of any such payments made to individuals and other
non-exempt shareholders who have not provided a correct taxpayer identification
number ("TIN") and made certain required certifications that appear in the
Shareholder Application. You may also be subject to backup withholding if the
IRS or a securities dealer notifies the Fund that the number furnished by you is
incorrect or that you are subject to backup withholding for previous
under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
WHO RUNS THE FUND?
The team responsible for the day-to-day management of each Series' portfolio is:
GROWTH SERIES: Vivian J. Palmieri since 1965 and Conrad B. Herrmann since
1991.
Vivian J. Palmieri
Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Palmieri holds a Bachelor of Arts degree in economics from Williams
College. He has been with Advisers or an affiliate since 1965. Mr. Palmieri
is a member of several securities industry associations.
Conrad B. Herrmann
Portfolio Manager
Franklin Advisers, Inc.
Mr. Herrmann, a Chartered Financial Analyst and holds a Master's of Business
Administration degree from Harvard University. He earned his Bachelor of Arts
degree from Brown University. Mr. Herrmann has been with Advisers or an
affiliate and is a member of several securities industry associations.
UTILITIES SERIES: Greg Johnson since 1987; Charles B. Johnson since 1957; and
Sally Edwards Haff since 1990.
Gregory E. Johnson
Vice President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Johnson holds a Bachelor of Science degree in accounting and business
administration from Washington and Lee University and a certificate as a
Certified Public Accountant. He has been with Advisers or an affiliate since
1986. Mr. Johnson is a member of several securities industry-related
associations.
Sally Edwards Haff
Portfolio Manager
Franklin Advisers, Inc.
Ms. Haff is a Chartered Financial Analyst and holds a Bachelor of Arts degree
in economics from the University of California at Santa Barbara. She has been
with Advisers or an affiliate since 1987. Ms. Haff is a member of several
securities industry-related associations.
Ian Link
Portfolio Manager
Franklin Advisers, Inc.
Mr. Link is a Chartered Financial Analyst and holds a Bachelor of Arts degree
in economics from the University of California at Davis. He has been with
Franklin Resources, Inc. since 1989 and with Advisers or an affiliate since
1995. He is a member of several securities industry-related associations.
DYNATECH SERIES: Rupert H. Johnson, Jr. since inception, Lisa Costa since
1983 and Kevin Carrington since 1993.
Rupert H. Johnson, Jr.
President and Portfolio Manager
Franklin Advisers, Inc.
Mr. Johnson is a graduate of Washington and Lee University. He has been with
Advisers or an affiliate since 1965 and prior thereto was an officer in the
U.S. Marine Corps. Mr. Johnson is a member of several securities industry
associations.
Lisa Costa
Portfolio Manager
Franklin Advisers, Inc.
Ms. Costa holds a Master of Business Administration degree from Golden Gate
University, and a Bachelor of Science degree in finance from California State
University at Hayward. She has been with Advisers or an affiliate since 1983.
Ms. Costa is a Chartered Market Technician and a member of several securities
industry associations.
Kevin Carrington
Portfolio Manager
Franklin Advisers, Inc.
Mr. Carrington holds a Bachelor of Science degree in business administration
from California State University at Chico. He has been with Franklin
Resources, Inc. since 1992 and with Advisers or an affiliate since 1993.
INCOME SERIES: Charles B. Johnson since 1957 and Matt Avery since 1989.
Charles B. Johnson
Chairman of the Board
Franklin Advisers, Inc.
Mr. Johnson holds a Bachelor of Arts degree in economics and political
science from Yale University. He has been with Advisers or an affiliate since
1957. Mr. Johnson is a member of several securities industry associations.
Matt Avery
Portfolio Manager
Franklin Advisers, Inc.
Mr. Avery hold a Master's Degree from the University of California at Los
Angeles' Graduate School of Management and a Bachelor of Science degree in
industrial engineering from Stanford University. He has been in the securities
industry since 1982 and with Advisers or an affiliate since 1987.
THE U.S. GOVERNMENT SECURITIES SERIES: Jack Lemein since 1984; Tony Coffey
since 1989; and Roger Bayston since 1993.
Jack Lemein
Senior Vice President
Franklin Advisers, Inc.
Mr. Lemein holds a Bachelor of Science degree in finance from the University of
Illinois. He has been in the securities industry since 1967 and with Advisers or
an affiliate since 1984. He is a member of several securities industry
associations.
Tony Coffey
Portfolio Manager
Franklin Advisers, Inc.
Mr. Coffey is a Chartered Financial Analyst and holds a Master of Business
Administration degree from the University of California at Los Angeles. He
earned a Bachelor of Arts degree in applied mathematics and economics from
Harvard University. Mr. Coffey has been with Advisers or an affiliate since
1989. He is a member of several securities industry associations.
Roger Bayston
Portfolio Manager
Franklin Advisers, Inc.
Mr. Bayston is a Chartered Financial Analyst and holds a Masters of Business
Administration degree from the University of California at Los Angeles. He
earned his Bachelor of Science degree from the University of Virginia. He has
been with Advisers or an affiliate since 1991. Prior thereto, Mr. Bayston was
an Assistant Treasurer for Bankers Trust Company.
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS:
MOODY'S
Aaa - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C- BONDS rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - This rating is reserved for income bonds on which no interest is being paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
U.S. GOVERNMENT
SECURITIES SERIES
FRANKLIN CUSTODIAN FUNDS, INC.
PROSPECTUS FEBRUARY 1, 1996
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
The U.S. Government Securities Series (the "Fund") is a diversified series of
Franklin Custodian Funds, Inc. ("Custodian Funds"), an open-end management
investment company. The investment objective of the Fund is income through
investment in obligations of the U.S. government or its instrumentalities. At
the present time, the assets of the Fund are invested in obligations of the
Government National Mortgage Association ("Ginnie Maes" or "GNMA").
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, it should be retained for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
This Prospectus pertains only to the U.S. Government Securities Series. A
separate Prospectus, also dated February 1, 1996, as may be further amended from
time to time, describes all five series of Custodian Funds and is incorporated
herein by reference. A Statement of Additional Information ("SAI") concerning
Custodian Funds dated February 1, 1996, as may be amended from time to time,
provides a further discussion of certain areas in this Prospectus and other
matters which may be of interest to some investors. It has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated herein by
reference. A copy is available without charge from the Fund or the Fund's
principal underwriter, Franklin/Templeton Distributors, Inc. ("Distributors"),
at the address or telephone number shown above.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Fund offers two classes of shares to its investors: U.S. Government
Securities Series - Class I ("Class I") and U.S. Government Securities Series -
Class II ("Class II"). You can choose between Class I shares, which generally
bear a higher front-end sales charge and lower ongoing Rule 12b-1 distribution
fees ("Rule 12b-1 fees"), and Class II shares, which generally have a lower
front-end sales charge and higher ongoing Rule 12b-1 fees. You should consider
the differences between the two classes, including the impact of sales charges
and Rule 12b-1 fees, in choosing the more suitable class given your anticipated
investment amount and time horizon. See "How Do I Buy Shares? - Differences
Between Class I and Class II."
CONTENTS PAGE
Expense Table
Financial Highlights - How Has the Fund Performed?
What is the U.S. Government Securities Series?
How Does the Fund Invest Its Assets?
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are Available to Me as a Shareholder?
What If My Investment Outlook Changes? - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
EXPENSE TABLE
<TABLE>
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. These figures are based on aggregate operating expenses
of Class I shares of each Series for the fiscal year ended September 30, 1995.
<CAPTION>
CLASS I CLASS II
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C>
Maximum Sales Charge Imposed on Purchases
as a percentage of offering price) 4.25% 1.00%^
Deferred Sales Charge NONE^^ 1.00%^^^
Exchange Fee (per transaction) $5.00+ $5.00+
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.45% 0.45%
Rule 12b-1 Fees 0.08%* 0.65%*
Other Expenses:
Shareholder Servicing Costs 0.04% 0.04%
Reports to Shareholders 0.03% 0.03%
Other 0.01% 0.01%
----- -----
Total Other Expenses 0.08% 0.08%**
----- -------
Total Fund Operating Expenses 0.61% 1.18%
===== =====
^Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fees for Class II may cause you to pay more for Class II
shares than for Class I shares. Given the maximum front-end sales charge and the
rate of Rule 12b-1 fees of each class, it is estimated that this will take less
than six years if you maintain total shares valued at less than $100,000 in the
Franklin Templeton Funds. If your investments in the Franklin Templeton Funds
are valued at $100,000 or more you will reach the crossover point more quickly.
See "How Do I Buy Shares? - Purchase Price of Fund Shares" for the definition of
Franklin Templeton Funds and similar references.
^^Class I investments of $1 million or more are not subject to a front-end
sales charge; however, a contingent deferred sales charge of 1% is generally
imposed on certain redemptions within a "contingeny period" of 12 months of
the calendar month of such investments. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
^^^Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred
sales charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
+$5.00 fee imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
*Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
</TABLE>
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
EXAMPLE
<TABLE>
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charge, that apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period.
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Class I $48* $61 $75 $115
Class II $32 $47 $74 $152
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
You would pay the following expenses on the same investment, assuming no
redemption.
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
<S> <C> <C> <C> <C>
Class II $22 $47 $74 $152
</TABLE>
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY
BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund
and only indirectly by you as a result of your investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
FINANCIAL HIGHLIGHTS - HOW HAS THE FUND PERFORMED?
<TABLE>
Set forth below is a table containing the financial highlights for a share of
each class of the Fund. The information for each of the five fiscal years in the
period ended September 30, 1995 has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Fund's Annual Report to Shareholders dated September 30, 1995. The remaining
figures, which are also audited, are not covered by the auditor's current
report. See the discussion "Reports to Shareholders" under "General
Information."
<CAPTION>
Per Share Operating Performance Ratios/Supplemental Data^
----------------------------------------------------- ---------------------------
Net Real- Distri- Distri- Ratio Ratio of
Net ized & Un- Total butions butions Net Net of Ex- Net In- Port-
Asset Net realized From In- From Net From Asset Assets penses vestment folio
Year Value Invest- Gain (Loss) vestment Invest- Realized Total Value at End to Aver- Income to Turn-
Ended Beginning ment on Invest- Opera- ment Capital Distri- at End Total of Year age Net Average over
Sep. 30 of Year Income ments tions Income Gains butions of Year Return+ (in 000's) Assets Net Assets Rate^^
Class I
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1985 $6.85 $0.880 $0.500 $1.380 $(0.900) $-- $(0.900) $7.33 20.83% $ 6,512,982 0.57% 11.06% 9.27%
1986 7.33 0.790 0.165 0.955 (0.875) -- (0.875) 7.41 13.25 14,361,682 0.54 9.93 36.02
1987 7.41 0.698 (0.500) 0.198 (0.724) (0.014) (0.738) 6.87 2.22 13,024,437 0.52 9.49 52.92
1988 6.87 0.691 0.115 0.806 (0.696) -- (0.696) 6.98 11.77 12,112,775 0.53 9.85 34.14
1989 6.98 0.688 (0.072) 0.616 (0.696) -- (0.696) 6.90 8.95 11,260,310 0.52 9.99 25.70
1990 6.90 0.668 (0.020) 0.648 (0.688) -- (0.688) 6.86 9.47 11,143,333 0.52 9.72 18.23
1991 6.86 0.653 0.287 0.940 (0.660) -- (0.660) 7.14 13.97 12,426,910 0.52 9.26 22.14
1992 7.14 0.609 0.106 0.715 (0.595) -- (0.595) 7.26 10.14 13,617,157 0.53 8.46 38.75
1993 7.26 0.557 0.056) 0.501 (0.561) -- (0.561) 7.20 6.86 14,268,516 0.52 7.71 43.10
1994 7.20 0.500 0.678) (0.178) (0.512) -- (0.512) 6.51 (2.75) 11,668,747 0.55 7.37 18.28
1995 6.51 0.497 0.348 0.845 (0.485) -- (0.485) 6.87 13.56 11,101,605 0.61 7.50 5.48
Class II
1995+ 6.67 0.206 0.167 0.373 (0.193) -- (0.193) 5.66 5.66 11,695 1.18++ 6.48++ 5.48
^Ratios for the year ended 1995, Class I and Class II, have been calculated
using the daily average net assets during the period. +For the period May 1,
1995 (effective date) to September 30, 1995.
++Annualized.
*Total return measures the change in value of an investment over the periods
indicated. It does not include the maximum front-end sales charge and assumes
reinvestment of dividends at the maximum offering price and capital gains, if
any, at net asset value. Prior to May 1, 1994, with the implementation of the
Rule 12b-1 Class I distribution plans, the existing sales charge on reinvested
dividends was eliminated. ^^Maturity of U.S. government issues and the
reinvestment of the proceeds thereof are considered as purchases and sales of
securities in computing the portfolio turnover rate of the Fund.
</TABLE>
WHAT IS THE U.S. GOVERNMENT SECURITIES SERIES?
The Fund is a diversified series of Custodian Funds, an open-end management
investment company, commonly called a "mutual fund" and registered with the SEC
under the Investment Company Act of 1940, as amended ("1940 Act"). Custodian
Funds was organized under the laws of Delaware in 1947 and reincorporated under
the laws of Maryland in 1979. Custodian Funds has five separate diversified
series with a par value of $0.01: Growth Series, DynaTech Series, Utilities
Series, Income Series and U.S. Government Securities Series. The Growth Series,
Utilities Series, Income Series and U.S. Government Securities Series issue two
classes of capital stock ("multiclass" structure): Growth Series - Class I,
Growth Series - Class II, Utilities Series - Class I, Utilities Series - Class
II, Income Series - Class I, Income Series - Class II, U.S. Government
Securities Series - Class I and U.S. Government Securities Series - Class II.
All Fund shares outstanding before May 1, 1995, have been redesignated as Class
I shares, and will retain their previous rights and privileges except for
legally required modifications to shareholder voting procedures as discussed in
"General Information - Organization and Voting Rights." According to statistics
published by Lipper Analytical Services, Inc., as of September 30, 1994, the
U.S. Government Securities Series is still the largest non-money market
government securities mutual fund.
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the net asset value (see "How
Are Fund Shares Valued?" in this Prospectus and the SAI), plus a variable sales
charge not exceeding 4.25% of the offering price depending upon the amount
invested. The current public offering price of the Class II shares is equal to
the net asset value, plus a sales charge of 1.0% of the amount invested. See
"How Do I Buy Shares?"
HOW DOES THE FUND INVEST ITS ASSETS?
The Fund's investment objective is income through investment in a portfolio
limited to securities which are obligations of the U.S. government or its
instrumentalities. The objective is a fundamental policy of the Fund and may not
be changed without shareholder approval. U.S. government securities include, but
are not limited to, U.S. Treasury bonds, notes and bills, Treasury certificates
of indebtedness and securities issued by instrumentalities of the U.S.
government. Other than investments in short-term U.S. Treasury securities or
assets held in cash pending investment, the assets of the Fund are currently
invested solely in obligations ("GNMAs" or "Ginnie Maes") of the Government
National Mortgage Association ("Association").
The Fund believes that its investment policies, as stated in this Prospectus and
the SAI, make the Fund a permissible investment for federal credit unions, based
on the Fund's understanding of the laws and regulations governing credit union
regulations as of September 30, 1995. CREDIT UNION INVESTORS ARE ADVISED TO
CONSULT THEIR OWN LEGAL ADVISERS TO DETERMINE WHETHER AND TO WHAT EXTENT THE
SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM. Please see the SAI
("The Fund's Investment Objectives and Restrictions" -- "Credit Union Investment
Regulations") for details.
INFORMATION ABOUT GNMAS
GNMAs are mortgage-backed securities representing part ownership of a pool of
mortgage loans. GNMAs differ from other bonds in that principal may be paid back
on an unscheduled basis rather than returned in a lump sum at maturity. The Fund
will purchase GNMAs for which principal and interest are guaranteed. The Fund
also purchases "adjustable rate" GNMAs and may also purchase other types of
securities which may be issued with the Association's guarantee.
THE ASSOCIATION'S GUARANTEE OF PAYMENT OF PRINCIPAL AND INTEREST ON GNMAS IS
BACKED BY THE FULL FAITH AND CREDIT OF THE UNITED STATES GOVERNMENT. THE
ASSOCIATION MAY BORROW U.S. TREASURY FUNDS TO THE EXTENT NEEDED TO MAKE PAYMENTS
UNDER ITS GUARANTEE. OF COURSE, THIS GUARANTEE DOES NOT EXTEND TO THE MARKET
VALUE OR YIELD OF THE GNMAS OR THE NET ASSET VALUE OR PERFORMANCE OF THE FUND,
WHICH WILL FLUCTUATE DAILY WITH MARKET CONDITIONS.
Payments to holders of GNMAs consist of the monthly distributions of interest
and principal less the Association's and issuers' fees. The portion of the
monthly payment which represents a return of principal will be reinvested by the
Fund in securities which may bear interest at a rate higher or lower than the
obligation from which the principal payment was received.
When mortgages in the pool underlying a GNMA are prepaid by borrowers or as a
result of foreclosure, such principal payments are passed through to the GNMA
holders, such as the Fund. Accordingly, a GNMA's life is likely to be
substantially shorter than the stated maturity of the mortgages in the
underlying pool. Because of such variation in prepayment rates, it is not
possible to accurately predict the life of a particular GNMA.
GNMA yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. Government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
GNMA will generally decline. In a period of declining interest rates, however,
it is more likely that mortgages contained in GNMA pools will be prepaid, thus
reducing the effective yield. This potential for prepayment during periods of
declining interest rates may reduce the general upward price increases of GNMAs
as compared to the increases experienced by noncallable debt securities over the
same periods. Moreover, any premium paid on the purchase of a GNMA will be lost
if the obligation is prepaid. Of course, price changes of GNMAs and other
securities held by the Fund will have a direct impact on the net asset value per
share of the Fund.
The Fund's investments are continually monitored and changes are made as market
conditions warrant. However, the Fund does not engage in the trading of
securities for the purpose of realizing short-term profits.
SOME OF THE OTHER INVESTMENT
POLICIES OF THE FUND
The Fund does not borrow money or mortgage or pledge any of its assets except
that it may borrow for temporary or emergency purposes in an amount up to 5% of
total asset value. The Fund does not currently engage in option transactions or
repurchase agreements. The Fund does not loan its securities or acquire illiquid
securities or the securities of foreign issuers.
The Fund may purchase and sell GNMA Certificates on a "To-Be-Announced" ("TBA")
and "delayed delivery" basis. These transactions are arrangements under which
the Fund may purchase securities with payment and delivery scheduled for a
future time up to 60 days after purchase. The transactions are subject to market
fluctuation and are subject to the risk that the value or yields at delivery may
be more or less than the purchase price or the yields available when the
transaction was entered into. In TBA and delayed delivery transactions, the Fund
relies on the seller to complete the transaction. The other party's failure to
do so may cause the Fund to miss a price or yield considered advantageous.
Securities purchased on a TBA or delayed delivery basis do not generally earn
interest until their scheduled delivery date. The Fund is not subject to any
percentage limit on the amount of its assets which may be invested in delayed
delivery and TBA purchase obligations. More information concerning these
transactions is included in the SAI.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see "How Does the Fund Invest
Its Assets? and "Investment Restrictions" in the SAI.
THE PRICE PER SHARE YOU ON REDEMPTION MAY BE MORE OR LESS THAN THE PRICE YOU
PAID FOR THE SHARES. THE DIVIDENDS PER SHARE PAID BY THE FUND MAY ALSO VARY.
HOW YOU PARTICIPATE
IN THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
the you own will increase. If the securities owned by the Fund decrease in
value, the value of your shares will also decline. In this way, you participate
in any change in the value of the securities owned by the Fund.
In particular, changes in interest rates will affect the value of the Fund's
portfolio and thus its share price. Increased rates of interest which frequently
accompany higher inflation and/or a growing economy are likely to have a
negative effect on the value of Fund shares. History reflects both increases and
decreases in the prevailing rate of interest and these may reoccur unpredictably
in the future.
WHO MANAGES THE FUND?
The Board of Directors of Custodian Funds (the "Board") has the primary
responsibility for the overall management of the Fund and for electing the
officers of Custodian Funds who are responsible for administering its day-to-day
operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Franklin Advisers, Inc. ("Advisers" or "Manager"), serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly-owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its various subsidiaries (the "Franklin Templeton Group"). Advisers acts
as investment manager or administrator to 34 U.S. registered investment
companies (116 separate series) with aggregate assets of over $77 billion.
The team responsible for the day-to-day management of the Fund's portfolio is:
Jack Lemein since 1984, and Roger Bayston and Tony Coffey since 1993.
Mr. Lemein, Senior Vice President and Portfolio Manager of Advisers, holds a
Bachelor of Science degree in finance from the University of Illinois. He has
been in the securities industry since 1967 and with Advisers since 1984. He is a
member of several securities industry associations.
Mr. Bayston, Portfolio Manager of Advisers, holds a Bachelor of Science degree
from the University of Virginia and a Master's degree in Business Administration
from the University of California at Los Angeles. He has been with the Franklin
organization since 1991 (following completion of his MBA program) and was an
Assistant Treasurer for Bankers Trust Company from 1986 to 1989.
Mr. Coffey, Portfolio Manager of Advisers, holds a Master's degree in Business
Administration from the University of California at Los Angeles and a Bachelor
of Arts degree from Harvard University. He has been with Advisers since 1989.
From 1985 to 1987, Mr. Coffey was an associate with Analysis Group. He is a
member of several securities industry associations.
During the fiscal year ended September 30, 1995, management fees totaling 0.45%
of the average monthly net assets of the Fund were paid to Advisers.
It is not anticipated that the Fund will incur a significant amount of brokerage
expenses because GNMA securities are generally traded in principal transactions
that involve the receipt by the broker of a spread between the bid and ask
prices for the securities and not the receipt of commissions. In the event that
the Fund does participate in transactions involving brokerage commissions, it is
the Manager's responsibility to select brokers through whom such transactions
will be effected. The Manager would try to obtain the best execution on all such
transactions. If it is felt that more than one broker would be able to provide
the best execution, the Manager will consider the furnishing of quotations and
of other market services, research, statistical and other data for the Manager
and its affiliates, as well as the sale of shares of the Fund, as factors in
selecting a broker. Further information is included under "How Does the Fund
Purchase Securities For Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended September 30, 1995, expenses borne by Class I and
Class II shares of the Fund, including fees paid to Advisers and to Investor
Services, totaled 0.61% and 1.18% of the average net assets of such class.
PLANS OF DISTRIBUTION
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan," respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. Such
expenses may include, but are not limited to, the printing of prospectuses and
reports used for sales purposes, expenses of preparing and distributing sales
literature and related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares.
The maximum amount which the Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.15% per annum of Class I's
average daily net assets payable on a quarterly basis. All expenses of
distribution in excess of 0.15% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.50% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.15% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the amount invested to securities dealers who initiate
and are responsible for purchases of Class II shares. During the first year
following the purchase of Class II shares, Distributors will retain a portion of
Class II's Rule 12b-1 fees equal to 0.50% per annum of Class II's average daily
net assets to partially recoup fees Distributors pays to securities dealers in
connection with initial purchases of Class II shares.
Both Plans cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board's policies with regard to the
amount of the Class I Plan's fees, please see "The Fund's Underwriter" in the
SAI.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
DISTRIBUTIONS TO EACH CLASS OF SHARES
According to the requirements of the Internal Revenue Code of 1986, as amended
(the "Code"), dividends and capital gains will be calculated and distributed in
the same manner for Class I and Class II shares. The per share amount of any
income dividends will generally differ only to the extent that each class is
subject to different Rule 12b-1 fees.
DISTRIBUTION DATE
Although subject to change by the Board, without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
for shareholders of record on the last business day of the month, payable on or
about the 15th day of the following month. The amount of income dividend
payments by the Fund is dependent upon the amount of net income received by the
Fund from its portfolio holdings, is not guaranteed and is subject to the
discretion of the Board. Fund shares are quoted ex-dividend on the first
business day following the record date. THE FUND DOES NOT PAY "INTEREST" OR
GUARANTEE ANY FIXED RATE OF RETURN ON AN INVESTMENT IN ITS SHARES. THE FUND MAY
DETERMINE TO DEFER THE DECEMBER 31 RECORD DATE TO A DATE SHORTLY THEREAFTER IN
JANUARY FOR TAX OR OTHER OPERATIONAL REASONS.
In order to be entitled to a dividend, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you should be
aware that because the value of the Fund's shares is based directly on the
amount of its net assets, rather than on the principle of supply and demand, any
distribution of income or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution. While a dividend or
capital gain distribution received shortly after purchasing shares represents,
in effect, a return of a portion of your investment, it may be taxable as
dividend income or capital gain.
DISTRIBUTION OPTIONS
You may choose to receive your distributions from the Fund in any of these ways:
1.Purchase additional shares of the Fund - You may purchase additional
shares of the same class of the Fund (without a sales charge or imposition of a
contingent deferred sales charge) by reinvesting capital gain distributions, or
both dividend and capital gain distributions. If you are a Class II shareholder,
you may also reinvest your distributions in Class I shares of the Fund. This is
a convenient way to accumulate additional shares and maintain or increase your
earnings base.
2.Purchase shares of other Franklin Templeton Funds - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase Class I shares of another Franklin Templeton Fund.
Many shareholders find this a convenient way to diversify their investments.
3.Receive distributions in cash - You may choose to receive dividends, or
both dividend and capital gain distributions in cash. You may have the money
sent directly to you, to another person, or to a checking account. If you choose
to send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE SAME CLASS OF
THE FUND. You may change the distribution option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days
prior to the record date for the Fund to process the new option.
HOW TAXATION AFFECTS YOU AND THE FUND
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). By distributing all of its income and meeting certain other
requirements relating to the sources of its income and diversification of its
assets, the Fund will not be liable for federal income or excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
For corporate shareholders, none of the dividends paid by the Fund will qualify
for the dividends- received deduction.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on the sale or
exchange of Fund shares held for six months or less will be treated as a
long-term capital loss to the extent of capital gain dividends received with
respect to such shares.
Many states grant tax-free status to dividends paid to shareholders of mutual
funds from interest income earned by the fund from direct obligations of the
U.S. government, subject in some states to minimum investment requirements that
must be met by the Fund. Investments in GNMA securities do not generally qualify
for tax-free treatment. At the end of each calendar year, the Fund will provide
shareholders with the percentage of any dividends paid which may qualify for
such tax-free treatment. Shareholders should consult their own tax advisors with
respect to the application of their state and local income tax laws to these
distributions.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will promptly, after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes on
their shares of the Fund and distributions and redemption proceeds received from
the Fund.
HOW DO I BUY SHARES?
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors. The use of the term "securities dealer"
shall include other financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity. The minimum initial investment
is $100 and subsequent investments must be $25 or more. These minimums may be
waived when the shares are purchased through plans established by the Franklin
Templeton Group. The Fund and Distributors reserve the right to refuse any order
for the purchase of shares.
DIFFERENCES BETWEEN CLASS I AND CLASS II
Class I and Class II shares differ in the amount of their front-end sales
charges and Rule 12b-1 fees, as well as the circumstances under which the
contingent deferred sales charge applies. Generally, Class I shares have higher
front-end sales charges than Class II shares and comparatively lower Rule 12b-1
fees. Voting rights of each class will be the same on matters affecting the Fund
as a whole, but each class will vote separately on matters affecting only
shareholders of that class. See "General Information - Organization and Voting
Rights."
CLASS I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and may be purchased at a reduced front-end
sales charge or at net asset value if certain conditions are met. In most
circumstances, contingent deferred sales charges will not be assessed against
redemptions of Class I shares. Class I shares are subject to Rule 12b-1 fees of
up to a maximum of 0.15% per annum of the average daily net assets of the class.
See "Who Manages the Fund?" and "How Do I Sell Shares?" for more information.
CLASS II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent sales charge of 1% if shares are redeemed
within 18 months of the calendar month of purchase. In addition, Class II shares
are subject to Rule 12b-1 fees of up to a maximum of .65% per annum of the
average daily net assets of Class II shares, 0.50% of which will be retained by
Distributors during the first year of investment.
DECIDING WHICH CLASS TO PURCHASE
You should carefully evaluate your anticipated investment amount and time
horizon prior to determining which class of shares to purchase. Generally, if
you expect to invest less than $100,000 in the Franklin Templeton Funds and to
make substantial redemptions within approximately six years or less of
investment, you should consider purchasing Class II shares. However, the higher
annual Rule 12b-1 fees on Class II shares will result in higher operating
expenses (which will accumulate over time to outweigh the difference in
front-end sales charges) and lower income dividends for Class II shares. For
this reason, Class I shares may be more attractive to you if you plan to invest
in the Fund over the long-term, even if no sales charge reductions are available
to you.
If you qualify to purchase Class I shares at reduced sales charges, you should
seriously consider purchasing Class I shares, especially if you intend to hold
your shares approximately six years or more. If you qualify to purchase Class I
shares at reduced sales charges but intend to hold your shares less than
approximately six years, you should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. IF YOU ARE
INVESTING $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO PURCHASE
CLASS I SHARES AT NET ASSET VALUE YOU MAY NOT PURCHASE CLASS II SHARES. See
"Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when shares may be purchased at net asset
value.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different front-end sales
charge, bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to you. Such purchases, however, may be
subject to a contingent deferred sales charge. You may exceed $1 million in
Class II shares by cumulative purchases over a period of time. If you intend to
make investments exceeding $1 million, however, you should consider purchasing
Class I shares through a Letter of Intent instead of purchasing Class II shares.
Each class has a separate schedule for compensating securities dealers for
selling Fund shares. You should take all of the factors regarding an investment
in each class into account before deciding which class of shares to purchase.
There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
WHEN PLACING PURCHASE ORDERS, YOU SHOULD CLEARLY INDICATE WHICH CLASS OF SHARES
YOU INTEND TO PURCHASE. A PURCHASE ORDER THAT FAILS TO SPECIFY A CLASS WILL
AUTOMATICALLY BE INVESTED IN CLASS I SHARES.
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after your securities dealer
receives the order which is promptly transmitted to the Fund or (2) after
receipt of an order by mail from the you directly in proper form (which
generally means a completed Shareholder Application accompanied by a negotiable
check).
CLASS I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "How Are Fund Shares Valued?"
Set forth below is a table showing front-end sales charges and dealer
concessions for Class I shares.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
DEALER
AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*
----------------- ----- -------- ------
<C> <C> <C> <C>
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.15% 2.20% 2.00
$1,000,000 or more NONE NONE (see below)**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. Securities
dealers, who receive 90% or more of a sales commission may be deemed to be an
underwriter under the Securities Act of 1933, as amended.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
</TABLE>
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
all or a portion of investments of $1 million or more within the contingency
period. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of your current
purchase plus the cost or current value (whichever is higher) of your existing
investments in one or more of the funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds. Included for these aggregation purposes are (a)
the mutual funds in the Franklin Group of Funds except Franklin Valuemark Funds
and Franklin Government Securities Trust (the "Franklin Funds"), (b) other
investment products underwritten by Distributors or its affiliates, and (c) the
U.S. registered mutual funds in the Templeton Group of Funds except Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Funds"). Franklin Funds and
Templeton Funds are collectively referred to as the "Franklin Templeton
Fund(s)." Sales charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective only after
notification to Distributors that the investment qualifies for a discount.
Other Payments to Securities Dealers. Either Distributors or one of its
affiliates may make payments, out of its own resources, of up to 1% of the
amount purchased to securities dealers who initiate and are responsible for
purchases made at net asset value by certain designated retirement plans
(excluding IRA and IRA rollovers), certain non-designated plans, certain trust
companies and trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10 million or more. See
"Description of Special Net Asset Value Purchases" below and "How Do I Buy and
Sell Shares?" in the SAI.
CLASS II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase,
as indicated in the table below:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
DEALER
AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*
<S> <C> <C> <C>
Any Amount (less than $1
million) 1.00% 1.01% 1.00%
*Either Distributors or one of its affiliates may make additional payments to
securities dealers, out of its own resources, of up to 1% of the amount
invested. During the first year following a purchase of Class II shares,
Distributors will keep a portion of the Rule 12b-1 fees assessed to those shares
to partially recoup fees Distributors pays to securities dealers.
</TABLE>
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Fund or its
shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI under "How Do I Buy and Sell Shares?".
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included under "Officers and Directors"
in the SAI.
QUANTITY DISCOUNTS IN
SALES CHARGES - CLASS I SHARES ONLY
Class I shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales charge,
you or your securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of your spouse, children under
the age of 21, and grandchildren under the age of 21. The value of Class II
shares you own may also be included for this purpose.
In addition, an investment in Class I shares may qualify for a reduction in the
sales charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined
with the amount of the current purchase in determining the sales charge to be
paid.
2. LETTER OF INTENT. You may immediately qualify for a reduced sales charge on a
purchase of Class I shares by completing the Letter of Intent section of the
Shareholder Application (the "Letter"). By completing the Letter, you (i)
express an intention to invest during the next 13 months a specified amount
which, if made at one time, would qualify for a reduced sales charge, (ii) grant
to Distributors a security interest in the reserved shares discussed below, and
(iii) irrevocably appoint Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or all shares for the purpose of
paying any additional sales charge due. Purchases under the Letter will conform
with the requirements of Rule 22d-1 under the 1940 Act. You or your securities
dealer must inform Investor Services or Distributors that this Letter is in
effect each time a purchase is made.
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING PROVISIONS BY COMPLETING THE LETTER
OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%) of the
amount of the total intended purchase will be reserved in Class I shares
registered in your name, to assure that the full applicable sales charge will be
paid if the intended purchase is not completed. The reserved shares will be
included in the total shares owned as reflected on periodic statements. Income
and capital gain distributions on the reserved shares will be paid as you have
directed. You will not be able to dispose of the reserved shares until the
Letter has been completed or the higher sales charge paid. This policy of
reserving shares does not apply to certain benefit plans described under
"Description of Special Net Asset Value Purchases." For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares you own may be included in determining a
reduced sales charge to be paid on Class I shares pursuant to the Letter of
Intent and Rights of Accumulation programs.
GROUP PURCHASES OF CLASS I SHARES
If you are a member of a qualified group you may purchase Class I shares of the
Fund at the reduced sales charge applicable to the group as a whole. The sales
charge is based upon the aggregate dollar value of shares previously purchased
and still owned by the members of the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and still
held $80,000 of Fund shares and now were investing $25,000, the sales charge
would be 3.50%. Information concerning the current sales charge applicable to a
group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount, and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If you select a payroll deduction plan, subsequent investments will be automatic
and will continue until such time as you notify the Fund and your employer to
discontinue further investments. Due to the varying procedures used to prepare,
process and forward the payroll deduction information to the Fund, there may be
a delay between the time of the payroll deduction and the time the money reaches
the Fund. The investment in the Fund will be made at the offering price per
share determined on the day that both the check and payroll deduction data are
received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors, and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment account only; (6) current employees of securities dealers and their
affiliates and by their family members, in accordance with the internal policies
and procedures of the employing securities dealer and affiliate; (7) insurance
company separate accounts for pension plan contracts; and (8) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the Code, in
shares of the Fund.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 days, their shares of the Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. IF A DIFFERENT CLASS OF SHARES IS
PURCHASED, THE FULL FRONT-END SALES CHARGE MUST BE PAID AT THE TIME OF PURCHASE
OF THE NEW SHARES. Under this privilege, you may reinvest an amount not
exceeding the redemption proceeds. While credit will be given for any contingent
deferred sales charge paid on the shares redeemed and subsequently repurchased,
a new contingency period will begin. Shares that were no longer subject to a
contingent deferred sales charge will be reinvested at net asset value and will
not be subject to a new contingent deferred sales charge. Shares of the Fund
redeemed in connection with an exchange into another fund (see "What If My
Investment Outlook Changes? - Exchange Privilege") are not considered "redeemed"
for this privilege. In order to exercise this privilege, a written order for the
purchase of shares of the Fund must be received by the Fund or the Fund's
Shareholder Services Agent within 365 days after the redemption. The 365 days,
however, do not begin to run on redemption proceeds placed immediately after
redemption in a Franklin Bank Certificate of Deposit ("CD") until the CD
(including any rollover) matures. Reinvestment at net asset value may also be
handled by a securities dealer or other financial institution, who may charge
you a fee for this service. The redemption is a taxable transaction but
reinvestment without a sales charge may affect the amount of gain or loss
recognized and the tax basis of the shares reinvested. If there has been a loss
on the redemption, the loss may be disallowed if a reinvestment in the same fund
is made within a 30-day period. Information regarding the possible tax
consequences of such a reinvestment is included in the tax section of this
Prospectus and under "Additional Information Regarding Taxation" in the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gain distributions from investments in that class of
shares of the Fund within 365 days of the payment date of such distribution.
Class II shareholders may also direct such distributions for investment at net
asset value in a Class I Franklin Templeton Fund. To exercise this privilege, a
written request to reinvest the distribution must accompany the purchase order.
Additional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distribution Options" under "What Distributions Might I
Receive from the Fund?"
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has investment objectives similar to
those of the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker-dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by anyone who has taken a distribution from
an existing retirement plan already invested in the Franklin Templeton Funds,
including former participants of the Franklin Templeton Profit Sharing 401(k)
plan, to the extent of such distribution. In order to exercise this privilege a
written order for the purchase of shares of the Fund must be received by
Franklin Templeton Trust Company (the "Trust Company"), the Fund or the Fund's
Shareholder Services Agent within 365 days after the plan distribution.
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. In connection with investments by eligible governmental
authorities at net asset value made through a securities dealer who has executed
a dealer agreement with Distributors, either Distributors or one of its
affiliates may make a payment, out of its own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact the
Franklin Templeton Institutional Services Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET VALUE PURCHASES
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13-month period in the Fund or in any of
the Franklin Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups
previously described under "Group Purchases of Class I Shares," which enable
Distributors to realize economies of scale in its sales efforts and sales
related expenses.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to the
amount to be purchased, which may be established by Distributors. Currently,
those criteria require that the amount invested or to be invested during the
subsequent 13-month period in the Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trustees or other fiduciaries purchasing
securities for certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without regard to where such
assets are currently invested.
Please see "How Do I Buy and Sell Shares?" in the SAI for further information
regarding net asset value purchases of Class I shares.
HOW DO I BUY SHARES IN CONNECTION WITH TAX-DEFERRED RETIREMENT PLANS?
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or the Trust Company may provide the
plan documents and serve as custodian or trustee. A plan document must be
adopted in order for a retirement plan to be in existence.
The Trust Company, an affiliate of Distributors, can serve as custodian or
trustee for retirement plans. Brochures for Trust Company plans contain
important information regarding eligibility, contribution and deferral limits
and distribution requirements. Please note that an application other than the
one contained in this Prospectus must be used to establish a retirement plan
account with Trust Company. To obtain a retirement plan brochure or application,
call 1-800/DIAL BEN (1-800/342-5236).
Please see "How Do I Sell Shares?" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from the Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from federal law, and banks and financial institutions selling Fund
shares may be required to register as dealers pursuant to state law.
WHAT PROGRAMS AND PRIVILEGES ARE AVAILABLE TO ME AS A SHAREHOLDER?
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND IF YOUR SHARES ARE HELD, OF RECORD, BY A
FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED ACCOUNT THROUGH
THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE "REGISTERING YOUR
ACCOUNT" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name on the books of the Fund, without the
issuance of a share certificate. Maintaining shares in uncertificated form (also
known as "plan balance") minimizes the risk of loss or theft of a share
certificate. A lost, stolen or destroyed certificate cannot be replaced without
obtaining a sufficient indemnity bond. The cost of such a bond, which is
generally borne by you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or your
securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1. Purchase shares of other Franklin Templeton Funds - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2. Receive payments in cash - You may choose to receive your payments in cash.
You may have the money sent directly to you, to another person, or to a checking
account. If you choose to have the money sent to a checking account, please see
"Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
You may terminate a Systematic Withdrawal Plan, change the amount and schedule
of withdrawal payments, or suspend a payment by notifying Investor Services in
writing at least seven business days prior to the end of the month preceding a
scheduled payment. The Fund may also terminate a Systematic Withdrawal Plan by
notifying you in writing and will automatically terminate a Systematic
Withdrawal Plan if all shares in your account are withdrawn or if the Fund
receives notification of the shareholder's death or incapacity.
ELECTRONIC FUND TRANSFERS
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact the Franklin Templeton Institutional Services Department at
1-800/321-8563.
WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these mutual funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, the Fund shares may be exchanged for
the same class of shares of other Franklin Templeton Funds which are eligible
for sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
of the other Franklin Templeton Funds. Class II shares may be exchanged for
Class II shares of any of the other Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within the contingency period, a contingent
deferred sales charge will be imposed. Before making an exchange, you should
review the prospectus of the fund you wish to exchange from and the fund you
wish to exchange into for all specific requirements or limitations on exercising
the exchange privilege, for example, limitations on a fund's sale of its shares,
minimum holding periods for exchanges at net asset value, or applicable sales
charges.
You may exchange shares in any of the following ways:
BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
BY TELEPHONE
YOU OR YOUR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE SHARES OF
THE FUND BY CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF YOU DO NOT
WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND
OR INVESTOR SERVICES.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS(R)
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value, as discussed under "How Do I Buy Shares?" Exchanges of Class I shares of
the Fund which were purchased with a lower sales charge into a fund which has a
higher sales charge will be charged the difference, unless the shares were held
in the Fund for at least six months prior to executing the exchange.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be transferred to
the fund being exchanged into and will be invested at net asset value. Because
the exchange is considered a redemption and purchase of shares, you may realize
a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and under "Additional Information Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objective exist immediately. Subsequently,
this money will be withdrawn from such short-term money market instruments and
invested in portfolio securities in as orderly a manner as is possible when
attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
EXCHANGES OF CLASS I SHARES
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
EXCHANGES OF CLASS II SHARES
When an account is composed of Class II shares subject to the contingent
deferred sales charge, and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares, and you exchange $3,000 into a new fund, $500 will be exchanged from
free shares, $1,000 from matured shares, and $1,500 from CDSC liable shares.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago, and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may you purchase shares of Money Fund II directly. Class II shares
exchanged for shares of Money Fund II will continue to age and a contingent
deferred sales charge will be assessed if CDSC liable shares are redeemed. No
other money market funds are available for Class II shareholders for exchange
purposes. Class I shares may be exchanged for shares of any of the money market
funds in the Franklin Templeton Funds except Money Fund II. Draft writing
privileges and direct purchases are allowed on these other money market funds as
described in their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another method
such as first-in first-out or free-shares followed by CDSC liable shares, the
exchanged shares may, in some instances, be CDSC liable even though a redemption
of such shares, as discussed elsewhere herein, may no longer be subject to a
contingent deferred sales charge. The proportional method is believed by
management to more closely meet and reflect the expectations of Class II
shareholders in the event shares are redeemed during the contingency period. For
federal income tax purposes, the cost basis of shares redeemed or exchanged is
determined under the Code without regard to the method of transferring shares
chosen by the Fund.
RETIREMENT PLAN ACCOUNTS
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange
shares directly. Certain restrictions may apply, however, to other types of
retirement plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
exchange shares based on predetermined market indicators ("Timing Accounts")
will be charged a $5.00 administrative service fee per each such exchange.
All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges shares equal in value to at least $5 million, or
more than 1% of the Fund's net assets. Accounts under common ownership or
control, including accounts administered so as to redeem or purchase shares
based upon certain predetermined market indicators, will be aggregated for
purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of an exchange
request by any Timing Account, person, or group if, in the Manager's judgment,
the Fund would be unable to invest effectively in accordance with its investment
objective and policies, or would otherwise potentially be adversely affected.
Your purchase exchanges may be restricted or refused if the Fund receives or
anticipates simultaneous orders affecting significant portions of the Fund's
assets. In particular, a pattern of exchanges that coincide with a "market
timing" strategy may be disruptive to the Fund and therefore may be refused.
The Fund and Distributors, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
TRANSFERS
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
CONVERSION RIGHTS
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
HOW DO I SELL SHARES?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. You may redeem shares in any of the following ways:
BY MAIL
Send a written request, signed by all registered owners, to Investor Services,
at the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) next computed after the
written request in proper form is received by Investor Services. Redemption
requests received after the time at which the net asset value is calculated will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the New York
Stock Exchange (the "Exchange") (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. You are requested to provide a telephone
number(s) where you may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact you promptly when necessary
will speed the processing of the redemption.
To be considered in proper form, signatures must be guaranteed if the redemption
request involves any of the following:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000;
or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation, and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
BY TELEPHONE
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." YOU MAY OBTAIN
ADDITIONAL INFORMATION ABOUT TELEPHONE REDEMPTIONS BY WRITING TO THE FUND OR
INVESTOR SERVICES AT THE ADDRESS SHOWN ON THE COVER OR BY CALLING
1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES
TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. YOU, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record.
Redemption requests by telephone will not be accepted within 30 days following
an address change by telephone. In that case, you should follow the other
redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction, are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund and the class, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of your redemption will be sent will
begin when the Fund receives all documents required to complete ("settle") the
repurchase in proper form. The redemption proceeds will not earn dividends or
interest during the time between receipt of the dealer's repurchase order and
the date the redemption is processed upon receipt of all documents necessary to
settle the repurchase. Thus, it is in your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares? in the SAI for more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions to participants or
their beneficiaries in Trust Company individual retirement plan accounts due to
death, disability or attainment of age 59 1/2; tax-free returns of excess
contributions from employee benefit plans; distributions from employee benefit
plans, including those due to termination or plan transfer; redemptions
initiated by the Fund due to an account falling below the minimum specified
account size; redemptions following the death of the shareholder or beneficial
owner; and redemptions through a Systematic Withdrawal Plan set up for shares
prior to February 1, 1995, and for Systematic Withdrawal Plans set up
thereafter, redemptions of up to 1% monthly of an account's net asset value (3%
quarterly, 6% semiannually or 12% annually). For example, if a Class I account
maintained an annual balance of $1,000,000, only $120,000 could be withdrawn
through a once-yearly Systematic Withdrawal Plan free of charge. Any amount over
that $120,000 would be assessed a 1% contingent deferred sales charge. Likewise,
if a Class II account maintained an annual balance of $10,000, only $1,200 could
be withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a SPECIFIED DOLLAR
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a SPECIFIC
NUMBER of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption.
The right of redemption may be suspended or the date of payment postponed if the
Exchange is closed (other than customary closing) or upon the determination of
the SEC that trading on the Exchange is restricted or an emergency exists, or if
the SEC permits it, by order, for the protection of shareholders. Of course, the
amount received may be more or less than the amount you invested, depending on
fluctuations in the market value of securities owned by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
OTHER INFORMATION
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, (iv) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you will be able to redeem shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any redemption, distribution or
dividend payment changes. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance, or send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
HOW ARE FUND SHARES VALUED?
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of each class of shares of the
Fund).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund, except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of the Fund will be
computed on a pro rata basis based on the proportionate participation in the
Fund represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
HOW DO I GET MORE INFORMATION ABOUT MY INVESTMENT?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features. By calling the Franklin TeleFACTS(R) system at
1-800/247-1753, you may obtain Class I and Class II account information, current
price and, if available, yield or other performance information, specific to the
Fund or any Franklin Templeton Fund. In addition, Class I shareholders may
process an exchange, within the same class, into an identically registered
Franklin account, and request duplicate confirmation or year-end statements and
deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 110 and 210, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone.
<TABLE>
<CAPTION>
HOURS OF OPERATION
(MONDAY THROUGH
DEPARTMENT NAME TELEPHONE NO. FRIDAY)
<S> <C> <C>
Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m.
Dealer Services 1-800/524-4040 5:30 a.m. to 5:00 p.m.
Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m.
8:30 a.m. to 5:00 p.m.
(Saturday)
Retirement Plans 1-800/527-0637 5:30 a.m. to 5:00 p.m.
TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
</TABLE>
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
HOW DOES THE FUND MEASURE PERFORMANCE?
Advertisements, sales literature and communications to you may contain several
measures of a class' performance, including current yield, various expressions
of total return and current distribution rate. They may occasionally cite
statistics to reflect the Fund's volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for each class for other
periods, or based on investments at various sales charge levels or at net asset
value. For such purposes, total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed as
a percentage of the purchase price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments. It is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI) is not indicative
of the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of a class are
reflected in the current distribution rate which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by a class during the past 12 months by a current maximum
offering price for that class of shares. Under certain circumstances, such as
when there has been a change in the amount of dividend payout, or a fundamental
change in investment policies, it might be appropriate to annualize the
dividends paid during the period such policies were in effect, rather than using
the dividends during the past 12 months. The current distribution rate differs
from the current yield computation because it may include distributions to
shareholders from sources other than dividends and interest, such as short-term
capital gain, and is calculated over a different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum sales charge on the purchase of that class of shares. When there has
been a change in the sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment results of each class,
like all other investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment may earn in the
future or what a class' total return, current yield or distribution rate may be
in any future period.
Because Class II shares were not offered prior to May 1, 1995, no performance
data is available for these shares. After a sufficient period of time has
passed, Class II performance data will be available.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends September 30. Annual Reports containing audited
financial statements of Custodian Funds, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to Custodian
Funds at the telephone number or address set forth on the cover page of this
Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and under "General Information" in the SAI.
ORGANIZATION AND VOTING RIGHTS
The authorized capital stock of Custodian Funds consists of fourteen billion
shares of Capital Stock of $0.01 par value, all of which has been authorized by
the Board of Directors to be issued in five separate series, 7,000,000,000 of
which have been designated as Class I shares, and 7,000,000,000 of which have
been designated as Class II shares. Of those shares, 2,500,000,000 have been
designated as Class I shares of the Fund, and 2,500,000,000 have been designated
as Class II shares of the Fund. The Board of Directors is empowered by the
Charter to issue other series of Capital Stock and to increase or decrease the
number, but not below that at the time outstanding.
The assets received for the issue or sale of each series of the Capital Stock of
Custodian Funds and all income, earnings, profits and proceeds thereof, subject
only to the rights of creditors, are especially allocated to such series, and
constitute the underlying assets of such series. The underlying assets of each
series are required to be segregated on the books of account, and are to be
charged with the liabilities in respect to such series and with a share of the
general liabilities of Custodian Funds. Liabilities in respect to any two or
more series are to be allocated in proportion to the asset value of the
respective series except where direct expenses can otherwise be fairly
allocated. The Board of Directors has the right to determine which liabilities
are allocable to a given series, and which are general or allocable to two or
more series. In the event of the dissolution or liquidation of Custodian Funds,
the registered holders of the Capital Stock of any series are entitled to
receive as a class the underlying assets of such series available for
distribution to shareholders.
Shares of Capital Stock entitle their holders to one vote per share; however,
votes are made by series on matters affecting an individual series. Shares have
noncumulative voting rights which means that in all elections of directors, the
holders of more than 50% of the shares voting can elect 100% of the directors if
they choose to do so and, in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board of
Directors. Shares have no preemptive or subscription rights, and are fully
transferable. There are no conversion rights; however, holders of shares of each
class of any series may reinvest all or any portion of the proceeds from the
redemption or repurchase of such shares into shares of the same class of any
other series as described under "What If My Investment Outlook Changes? -
Exchange Privilege."
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state corporation law, or (3) required to be
voted on separately by class by the 1940 Act, or the rules adopted thereunder.
For instance, if a change to the Rule 12b-1 plan relating to Class I shares
requires shareholder approval, only shareholders of Class I may vote on the
change to the Rule 12b-1 plan affecting that class. Similarly, if a change to
the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
MEETINGS OF SHAREHOLDERS
Maryland General Corporation Law does not require corporations registered as
management investment companies under the 1940 Act to hold routine annual
meetings of shareholders and the Fund does not intend to hold such routine
annual shareholders meetings. The Fund may, however, hold a special shareholders
meeting for such purposes as changing fundamental investment restrictions,
approving a new management agreement or any other matters which are required to
be acted on by shareholders under the 1940 Act.
A meeting may also be called by the directors in their discretion or by
shareholders holding at least 10% of the shares entitled to vote at the meeting
for the purpose of voting upon the removal of directors, in which case
shareholders may receive assistance in communicating with other shareholders in
connection with the election or removal of directors such as that provided in
Section 16(c) of the 1940 Act. In addition, Maryland General Corporation Law
provides that a special meeting may be called by a majority of the Board of
Directors or by the written request of shareholders holding at least 25% of the
shares entitled to vote at the meeting.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem your shares, at net asset value, your
account has a value of less than $50, but only where the value of your account
has been reduced by your prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
OTHER INFORMATION
The Fund believes that the Fund is generally a permissible investment for
national banks, federally chartered savings and loan associations, federally
chartered credit unions and the Fishing Vessel Capital Construction Fund. Such
investors should confirm the permissibility of proposed investments in this
series with their counsel. See "Investment Objective and Policies of the Fund,"
above.
REGISTERING YOUR ACCOUNT
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment, or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are subject to
backup withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
INCOME SERIES
FRANKLIN CUSTODIAN FUNDS, INC.
PROSPECTUS FEBRUARY 1, 1996
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
The Income Series (the "Fund") is a diversified series of Franklin Custodian
Funds, Inc. (the "Custodian Funds"), an open-end management investment company.
The investment objective of the Fund is to maximize income while maintaining
prospects for capital appreciation. The Fund may invest in domestic and foreign
securities as described under "How Does the Fund Invest Its Assets?"
This Prospectus is intended to set forth in a clear and concise manner
information about the Fund that you should know before investing. After reading
the Prospectus, it should be retained for future reference; it contains
information about the purchase and sale of shares and other items which you will
find useful to have.
This Prospectus pertains only to the Income Series. A separate Prospectus, also
dated February 1, 1996, describes all five series of Custodian Funds and is
incorporated herein by reference. A Statement of Additional Information ("SAI")
concerning Custodian Funds, dated February 1, 1996 provides a further discussion
of certain areas in this Prospectus and other matters which may be of interest
to you. It has been filed with the Securities and Exchange Commission ("SEC")
and is incorporated herein by reference. A copy is available without charge from
the Fund or the Fund's principal underwriter, Franklin/Templeton Distributors,
Inc. ("Distributors"), at the address or telephone number shown above.
The Fund offers two classes of shares to its investors: Income Series - Class I
("Class I") and Income Series - Class II ("Class II"). You can choose between
Class I shares, which generally bear a higher front-end sales charge and lower
ongoing Rule 12b-1 distribution fees ("Rule 12b-1 fees"), and Class II shares,
which generally have a lower front-end sales charge and higher ongoing Rule
12b-1 fees. You should consider the differences between the two classes,
including the impact of sales charges and Rule 12b-1 fees, in choosing the more
suitable class given your anticipated investment amount and time horizon. See
"How Do I Buy Shares? - Differences Between Class I and Class II."
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK; FURTHER, SUCH SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
SHARES OF THE FUND INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THE FUND MAY INVEST UP TO 100% OF ITS PORTFOLIO IN NON-INVESTMENT GRADE BONDS,
COMMONLY KNOWN AS "JUNK BONDS," WHICH ENTAIL DEFAULT AND OTHER RISKS GREATER
THAN THOSE ASSOCIATED WITH HIGHER RATED SECURITIES. YOU SHOULD CAREFULLY ASSESS
THE RISKS ASSOCIATED WITH AN INVESTMENT IN THE FUND IN LIGHT OF THE SECURITIES
IN WHICH THE FUND INVESTS. SEE "WHAT ARE THE POTENTIAL RISKS RELATING TO HIGH
YIELD SECURITIES?"
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THIS PROSPECTUS IS NOT AN OFFERING OF THE SECURITIES HEREIN DESCRIBED IN ANY
STATE IN WHICH THE OFFERING IS NOT AUTHORIZED. NO SALES REPRESENTATIVE, DEALER,
OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. FURTHER
INFORMATION MAY BE OBTAINED FROM THE UNDERWRITER.
CONTENTS PAGE
Expense Table
Financial Highlights - How Has the Fund Performed?
What Is the Franklin Income Series?
How Does the Fund Invest Its Assets?
What Are the Potential Risks Relating
to High Yield Securities?
Who Manages the Fund?
What Distributions Might I Receive from the Fund?
How Taxation Affects You and the Fund
How Do I Buy Shares?
What Programs and Privileges Are
Available to Me as a Shareholder?
What If My Investment Outlook Changes?
- - Exchange Privilege
How Do I Sell Shares?
Telephone Transactions
How Are Fund Shares Valued?
How Do I Get More Information About My
Investment?
How Does the Fund Measure Performance?
General Information
Registering Your Account
Important Notice Regarding
Taxpayer IRS Certifications
Appendix
EXPENSE TABLE
The purpose of this table is to assist you in understanding the various costs
and expenses that you will bear directly or indirectly in connection with an
investment in the Fund. The figures for both classes are based on the aggregate
operating expenses of each class for the fiscal year ended September 30, 1995.
CLASS I CLASS II
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on 4.25% 1.00%+
Purchases (as a percentage of offering
price)
Deferred Sales Charge NONE++ 1.00%+++
Exchange Fee (per transaction) $5.00* $5.00*
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees 0.46% 0.46%
Rule 12b-1 Fees 0.13%** 0.65%**
Other Expenses:
Shareholder Servicing Costs 0.05% 0.05%
Reports to Shareholders 0.04% 0.04%
Other 0.03% 0.03%
Total Other Expenses 0.12% 0.12%
----- -----
Total Fund Operating Expenses 0.71% 1.23%
===== =====
+Although Class II has a lower front-end sales charge than Class I, over time
the higher Rule 12b-1 fee for Class II may cause shareholders to pay more for
Class II shares than for Class I shares. Given the maximum front-end sales
charge and the rate of Rule 12b-1 fees of each class, it is estimated that this
will take less than six years for shareholders who maintain total shares valued
at less than $100,000 in the Franklin Templeton Funds. Shareholders with larger
investments in the Franklin Templeton Funds will reach the crossover point more
quickly. See "How Do I Buy Shares? - Purchase Price of Fund Shares" for the
definition of Franklin Templeton Funds and similar references.
++Class I investments of $1 million or more are not subject to a front-end
sales charge; however, a contingent deferred sales charge of 1% is generally
imposed on certain redemptions within a "contingency period" of 12 months of
the calendar month of such investments. See "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
+++Class II shares redeemed within a "contingency period" of 18 months of the
calendar month of such investments are subject to a 1% contingent deferred
sales charge. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
*$5.00 fee imposed only on Timing Accounts as described under "What If My
Investment Outlook Changes? - Exchange Privilege." All other exchanges are
processed without a fee.
**The maximum amount of Rule 12b-1 fees allowed pursuant to the Class I
distribution plan is 0.15%. See "Who Manages the Fund? - Plans of Distribution."
Consistent with National Association of Securities Dealers, Inc.'s rules, it is
possible that the combination of front-end sales charges and Rule 12b-1 fees
could cause long-term shareholders to pay more than the economic equivalent of
the maximum front-end sales charges permitted under those same rules.
You should be aware that the above table is not intended to reflect in precise
detail the fees and expenses associated with an investment in the Fund. Rather,
the table has been provided only to assist you in gaining a more complete
understanding of fees, charges and expenses. For a more detailed discussion of
these matters, you should refer to the appropriate sections of this Prospectus.
EXAMPLE
As required by SEC regulations, the following example illustrates the expenses,
including the maximum front-end sales charge and applicable contingent deferred
sales charge, that apply to a $1,000 investment in the Fund over various time
periods assuming (1) a 5% annual rate of return and (2) redemption at the end of
each time period:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
CLASS I* $49 $64 $80 $127
CLASS II $32 $49 $77 $157
*Assumes that a contingent deferred sales charge will not apply to Class I
shares.
You would pay the following expenses on the same investment, assuming no
redemption:
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
CLASS II $22 $49 $77 $157
THIS EXAMPLE IS BASED ON THE AGGREGATE ANNUAL OPERATING EXPENSES SHOWN ABOVE AND
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES, WHICH MAY
BE MORE OR LESS THAN THOSE SHOWN. The operating expenses are borne by the Fund
and only indirectly by you as a result of your investment in the Fund. In
addition, federal securities regulations require the example to assume an annual
return of 5%, but the Fund's actual return may be more or less than 5%.
<PAGE>
FINANCIAL HIGHLIGHTS - HOW HAS THE FUND PERFORMED?
Set forth below is a table containing the financial highlights for a share of
each class of the Fund. The information for each of the five fiscal years in the
period ended September 30, 1995 has been audited by Coopers & Lybrand L.L.P.,
independent auditors, whose audit report appears in the financial statements in
the Fund's Annual Report to Shareholders dated September 30, 1995. The remaining
figures, which are also audited, are not covered by the auditors' current
report. See "Reports to Shareholders" under "General Information."
<TABLE>
<CAPTION>
Class I Shares:
Per Share Operating Performance Ratios/Supplemental Data+++
----------------------------------------------------- ---------------------------
Net Real- Distri- Distri- Ratio of Net
Net Asset ized & Un- Total butions butions Net Asset Net Assets Ratio of Investment
Year Value Net realized Gain From From Net From Total Value at End Expenses Income to Portfolio
Ended BeginningInvestment(Loss) on InvestmentInvestment Realized Distri- at End Total of Year to Average Average Turnover
Sep.30 of Year Income Investments Operations Income Capital Gains butions of Year Return* (in 000's) Net Assets Net Assets Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1986 $2.06 $0.230 $0.238 $0.468 $(0.220) $(0.058) $(0.278) $2.25 24.20% $226,418 0.71% 9.76% 30.76%
1987 2.25 0.206 0.004 0.210 (0.220) (0.020) (0.240) 2.22 9.08 484,270 0.64 9.20 18.14
1988 2.22 0.228 (0.096) 0.132 (0.220) (0.022) (0.242) 2.11 6.00 726,815 0.61 10.50 10.01
1989 2.11 0.222 0.009 0.231 (0.220) (0.011) (0.231) 2.11 11.16 1,189,694 0.57 10.46 12.05
1990 2.11 0.212 (0.324) (0.112) (0.220) (0.018) (0.238) 1.76 (6.37) 1,299,130 0.55 10.73 12.14
1991 1 76 0.190 0.350 0.540 (0.220) -- (0.220) 2.08 32.60 1,673,187 0.56 10.17 33.92
1992 2.08 0.190 0.194 0.384 (0.205) (0.009) (0.214) 2.25 18.80 2,483,501 0.55 9.11 23.30
1993 2.25 0.180 0.227 0.407 (0.185) (0.012) (0.197) 2.46 18.76 3,935,444 0.54 7.84 25.41
1994 2.46 0.170 (0.201) (0.031) (0.180) (0.029) (0.209) 2.22 (1.52) 4,891,505 0.64 7.37 23.37
1995 2.22 0.180 0.108 0.288 (0.180) (0.028) (0.208) 2.30 14.00 5,885,788 0.71 8.26 58.64
</TABLE>
+For the period May 1, 1995 (effective date) to September 30, 1995.
++Annualized. +++Ratios for the year ended 1995, Class I and Class II, have been
calculated using the daily average net assets during the period. *Total return
measures the change in value of an investment over the periods indicated. It is
not annualized. It does not include the maximum initial sales charge or the
deferred contingent sales charge. Prior to May 1, 1994, the total return for
Class I shares also assumes reinvestment of dividends at offering price and
capital gains, if any, at net asset value. Effective May 1, 1994 with the
implementation of the Rule 12b-1 distribution plan for Class I shares, the
existing sales charge on reinvested dividends has been eliminated.
WHAT IS THE FRANKLIN INCOME SERIES?
The Fund is a diversified series of Custodian Funds, an open-end management
investment company commonly called a "mutual fund," registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). Custodian Funds was
organized under the laws of Delaware in 1947 and reincorporated under the laws
of Maryland in 1979. Custodian Funds has five separate diversified series:
Growth Series, DynaTech Series, Utilities Series, Income Series and U.S.
Government Securities Series. The Growth Series, Utilities Series, Income Series
and U.S. Government Securities Series have two classes of shares of capital
stock ("multiclass" structure) with a par value of $0.01: Growth Series - Class
I, Growth Series - Class II, Utilities Series - Class I, Utilities Series -
Class II, Income Series - Class I, Income Series - Class II, U.S. Government
Securities Series - Class I and U.S. Government Securities Series - Class II.
All Fund shares outstanding before May 1, 1995, have been redesignated as Class
I shares, and will retain their previous rights and privileges except for
legally required modifications to shareholder voting procedures as discussed in
"General Information - Organization and Voting Rights."
You may purchase shares of the Fund (minimum investment of $100 initially and
$25 thereafter) at the current public offering price. The current public
offering price of the Class I shares is equal to the Fund's net asset value (see
"How Are Fund Shares Valued?" in this Prospectus and the SAI), plus a variable
sales charge not exceeding 4.25% of the offering price depending upon the amount
invested. The current public offering price of the Class II shares is equal to
the net asset value, plus a sales charge of 1% of the amount invested. See "How
Do I Buy Shares?"
HOW DOES THE FUND INVEST ITS ASSETS?
The Fund's principal investment objective is to maximize income while
maintaining prospects for capital appreciation. The objective is a fundamental
policy of the Fund and may not be changed without shareholder approval.
The Fund invests in a diversified portfolio of securities selected with
particular consideration of current income production. The underlying assets of
the Fund may be held in cash or cash equivalents, or invested in securities
traded on any national securities exchange or in securities issued by a
corporation, association or similar legal entity having gross assets valued at
not less than $1,000,000 as shown by its latest published annual report. The
Fund may also invest in preferred stocks. There are no restrictions as to the
proportion of investments which may be made in a particular type of security and
such determination is entirely within management's discretion. A breakdown of
the ratings for the bonds in the Fund's portfolio is included under "Asset
Composition Table" below.
The Fund may invest up to 100% of its portfolio in non-investment grade bonds,
commonly known as "junk bonds", which entail default and other risks greater
than those associated with higher rated securities. Investors should carefully
assess the risks associated with an investment in the Fund in light of the
securities in which the Fund invests.
Various investment services publish ratings of some of the types of securities
in which the Fund may invest. Higher yields are ordinarily available from
securities in the lower rated categories of the recognized rating services [that
is, securities rated Ba or lower by Moody's Investors Service ("Moody's") or BB
or lower by Standard & Poor's Corporation ("S&P")] or from unrated securities of
comparable quality. A list of these ratings is shown in the Appendix to this
Prospectus. These ratings, which represent the opinions of the rating services
with respect to the issuer's ability to pay interest and repay principal,
although they do not purport to reflect the risk of fluctuations in market value
and are not absolute standards of quality, will be considered in connection with
the investment of the Fund's assets, but will not be a determining or limiting
factor. The Fund may invest in securities regardless of their rating (including
securities in the lower rating categories) or in securities which are not rated,
including up to 5% of its assets in securities which are in default at the time
of purchase. As an operating policy, however, the Fund will generally invest in
securities that are rated at least Caa by Moody's or CCC by S&P, except for
defaulted securities as noted below or, if unrated, are at least of comparable
quality as determined by the investment manager. Unrated debt securities are not
necessarily of lower quality than rated securities but they may not be
attractive to as many buyers. (See the Appendix for a discussion of ratings.)
The Fund may also purchase debt obligations of issuers not currently paying
interest as well as issuers who are in default and may retain an issue which has
defaulted. Defaulted debt securities will be purchased if, in the opinion of the
investment manager, it may present an opportunity for subsequent price recovery,
the issuer may resume interest payments or other advantageous developments
appear likely in the near term. In general, securities which default lose much
of their value in the time period prior to the actual default so that the
security and thus the Fund's net asset value would be impacted prior to the
default. Defaulted debt securities may be illiquid and, as such, will be part of
the 10% limit discussed under "Illiquid Investments." See "What Are the
Potential Risks Relating to High Yield Securities?"
In the event the rating on an issue held in the Fund's portfolio is changed by
the rating service or the security goes into default, such event will be
considered by the Fund in its evaluation of the overall investment merits of
that security but will not generally result in an automatic sale of the
security.
Rather than relying principally on the ratings assigned by rating services, the
investment analysis of securities being considered for the Fund's portfolio may
also include, among other things, consideration of relative values, based on
such factors as anticipated cash flow, interest or dividend coverage, asset
coverage, earnings prospects, the experience and managerial strength of the
issuer, responsiveness to changes in interest rates and business conditions,
debt maturity schedules and borrowing requirements and the issuer's changing
financial condition and public recognition thereof. Since a substantial portion
of the Fund's portfolio at any particular time may consist of debt securities,
changes in the level of interest rates, among other things, will likely affect
the value of the Fund's holdings and thus the value of a shareholder's
investment.
Certain of the high yielding fixed-income securities in which the Fund may
invest may be purchased at a discount. Such securities, when held to maturity or
retired, may include an element of capital gain. Capital losses may be realized
when securities purchased at a premium, that is, in excess of their stated or
par value, are held to maturity or are called or redeemed at a price lower than
their purchase price. Capital gains or losses also may be realized upon the sale
of securities.
As market conditions change, it is conceivable that all of the assets of the
Fund could be invested in common stocks or, conversely, in debt securities. It
is a fundamental policy of the Fund that concentration of investment in a single
industry may not exceed 25% of the total assets of the Fund.
The Fund may invest up to 5% of its assets in loan participations and other
related direct or indirect bank obligations ("Loan Participations"). These
instruments are interests in floating or variable rate senior loans to U.S.
corporations, partnerships and other entities. While Loan Participations
generally trade at par value, the Fund will be able to acquire Loan
Participations, including those which sell at a discount because of the
borrower's credit problems. To the extent the borrower's credit problems are
resolved, the Loan Participation may appreciate in value. The investment manager
may acquire Loan Participations for the Fund when it believes that over the long
term, appreciation will take place. An investment in such securities, however,
carries substantially the same risk as that for defaulted debt securities and
may cause the loss of the entire investment to the Fund. Most Loan
Participations are illiquid and, to that extent, will be included in the 10%
limitation described under "Illiquid Investments".
The Fund may purchase debt obligations on a "when-issued" or "delayed-delivery"
basis. Such securities are subject to market fluctuation prior to delivery to
the Fund and generally do not earn interest until their scheduled delivery date.
Therefore, the value or yields at delivery may be more or less than the value or
the yields available when the transaction was entered into. When the Fund is the
buyer in such a transaction, it will maintain, in a segregated account with its
custodian, cash or high-grade marketable securities having an aggregate value
equal to the amount of such purchase commitments until payment is made. To the
extent the Fund engages in when-issued and delayed delivery transactions, it
will do so only for the purpose of acquiring portfolio securities consistent
with the Fund's investment objectives and policies, and not for the purpose of
investment leverage. See "How Does the Fund Invest Its Assets? - When-Issued,
Delayed Delivery and TBA Transactions" in the Fund's SAI for a more complete
discussion regarding when-issued and delayed-delivery transactions.
The Fund may also purchase certain bonds issued at discount which defer the
payment of interest or which pay no interest until maturity, known as zero
coupon bonds, or which pay interest through issuance of additional bonds, known
as pay-in-kind bonds. For federal tax purposes, holders of such bonds, such as
the Fund, are deemed to receive interest over the life of such bonds and are
taxed as if interest were paid on a current basis although no cash interest
payments are in fact received by the holder until the bonds mature. See "What
Are the Potential Risks Relating to High Yield Securities?" below for more
information regarding these types of bonds.
The Fund's total return for Class I, as calculated pursuant to the formula
prescribed by the SEC, for the one-, five- and ten-year periods for the Class I
shares ended on September 30, 1995 was 9.09%, 15.28% and 12.02% respectively.
See "How Does the Fund Measure Performance?"
SOME OF THE FUND'S OTHER INVESTMENT POLICIES
OPTIONS. The Fund may write covered call options which are listed for trading on
a national securities exchange. This means that the Fund will only write options
on securities which it actually owns. A call option gives the person who buys it
the right to buy the security on which the option is written for a specified
period of time for a price agreed to at the time the Fund sells the option, even
though that price may be less than the value of the security at the time the
option is exercised. When the Fund sells covered call options, it will receive a
cash premium which can be used in whatever way is felt to be most beneficial to
the Fund. The risks associated with covered call writing are that in the event
of a price rise on the underlying security which would likely trigger the
exercise of the call option, the Fund will not participate in the increase in
price beyond the exercise price. If the Fund determines that it does not wish to
deliver the underlying securities from its portfolio, it would have to enter
into a "closing purchase transaction," the premium on which may be higher or
lower than that received by the Fund for writing the option. There is no
assurance that a closing purchase transaction will be available in every
instance. Transactions in options are generally considered "derivative
securities."
LOANS OF PORTFOLIO SECURITIES. Consistent with procedures approved by the Board
of Directors and subject to the following conditions, the Fund may lend its
portfolio securities to qualified securities dealers or other institutional
investors, provided that such loans do not exceed 10% of the value of the Fund's
total assets at the time of the most recent loan. The borrower must deposit with
the Fund's custodian bank collateral with an initial market value of at least
102% of the initial market value of the securities loaned, including any accrued
interest, with the value of the collateral and loaned securities
marked-to-market daily to maintain collateral coverage of at least 100%. Such
collateral shall consist of cash, securities issued by the U.S. Government, its
agencies or instrumentalities, or irrevocable letters of credit. The lending of
securities is a common practice in the securities industry. The Fund may engage
in security loan arrangements with the primary objective of increasing the
Fund's income either through investing the cash collateral in short-term
interest bearing obligations or by receiving a loan premium from the borrower.
Under the securities loan agreement, the Fund continues to be entitled to all
dividends or interest on any loaned securities. As with any extension of credit,
there are risks of delay in recovery and loss of rights in the collateral should
the borrower of the security fail financially.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities. A
convertible security is generally a debt obligation or a preferred stock which
may be converted at a stated price within a specified period of time into a
certain quantity of the common stock of the same or different issuer. A
convertible security may also be subject to redemption by the issuer but only
after a particular date and under certain circumstances established upon issue.
Convertible securities provide a fixed-income stream and the opportunity,
through their conversion feature, to participate in the capital appreciation
resulting from a market price advance in the convertible security's underlying
common stock.
As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. The price of a convertible security is also influenced by
the market value of the security's underlying common stock and tends to increase
as the market value of the underlying stock rises, whereas it tends to decrease
as the market value of the underlying stock declines. A convertible security
tends to be senior to common stock, but at the same time is often subordinate to
other types of fixed income securities issued by its respective corporation.
Because it has features of both common stock and a straight fixed income
security, a convertible security's value can be influenced, as mentioned, by
both interest rate and market movements. Consequently, convertible securities
often are not influenced by a change in interest rates as much as a straight
fixed income security or a change in share price as drastically as the
respective common stock. This is because rather than a convertible security's
value largely being determined by just interest rates or share price, it is
often determined by a combination of the two.
The convertible debt obligations in which the Fund may invest are subject to the
same rating criteria as that Fund's investments in debt obligations. However
unlike convertible debt obligations, convertible preferred stocks are equity
securities. Like common stocks, preferred stocks are subordinated to all debt
obligations in the event of insolvency, and an issuer's failure to make a
dividend payment is generally not an event of default entitling the preferred
shareholder to take action. Like common stocks, preferred stocks generally have
no maturity date, so that their market value is dependent on the issuer's
business prospects for an indefinite period of time. Finally, preferred stock
dividends are dividends, rather than interest payments, and are treated as such
for corporate tax purposes. For these reasons, convertible preferred stocks are
treated as preferred stocks for the Fund's financial reporting, credit rating,
and investment limitation purposes.
The Fund may invest in convertible preferred stocks that offer enhanced yield
features, such as Preferred Equity Redemption Cumulative Stock ("PERCS"), which
provide an investor, such as the Fund, with the opportunity to earn higher
dividend income than is available on a company's common stock. A PERCS is a
preferred stock which generally features a mandatory conversion date, as well as
a capital appreciation limit which is usually expressed in terms of a stated
price. Most PERCS expire three years from the date of issue, at which time they
are convertible into common stock of the issuer (PERCS are generally not
convertible into cash at maturity).Under a typical arrangement, if after three
years the issuer's common stock is trading at a price below that set by the
capital appreciation limit, each PERCS would convert to one share of common
stock. If, however, the issuer's common stock is trading at a price above that
set by the capital appreciation limit, the holder of the PERCS would receive
less than one full share of common stock. The amount of that fractional share of
common stock received by the PERCS holder is determined by dividing the price
set by the capital appreciation limit of the PERCS by the market price of the
issuer's common stock. PERCS can be called at any time prior to maturity, and
hence do not provide call protection. However, if called early, the issuer must
pay a call premium over the market price to the investor. This call premium
declines at a preset rate daily, up to the maturity date of the PERCS.
The Fund may also invest in other enhanced convertible securities. These include
but are not limited to ACES (Automatically Convertible Equity Securities), PEPS
(Participating Equity Preferred Stock), PRIDES (Preferred Redeemable Increased
Dividend Equity Securities), SAILS (Stock Appreciation Income Linked
Securities), TECONS (Term Convertible Notes), QICS (Quarterly Income Cumulative
Securities), and DECS (Dividend Enhanced Convertible Securities). ACES, PEPS,
PRIDES, SAILS, TECONS, QICS, and DECS all have the following features; they are
company issued convertible preferred stock, unlike PERCS they do not have a
capital appreciation limit, they seek to provide the investor with high current
income with some prospect of future capital appreciation, they are typically
issued with three to four-year maturities, they typically have some built-in
call protection for the first two to three years, investors have the right to
convert them into shares of common stock at a preset conversion ratio or hold
them until maturity, and upon maturity they will automatically convert to either
cash or a specified number of shares of common stock.
An investment in an enhanced convertible security or any other security may
involve additional risks to the Fund. The Fund may have difficulty disposing of
such securities because there may be a thin trading market for a particular
security at any given time. Reduced liquidity may have an adverse impact on
market price and the Fund's ability to dispose of particular securities, when
necessary, to meet the Fund's liquidity needs or in response to a specific
economic event, such as a deterioration in the creditworthiness of an issuer.
Reduced liquidity in the secondary market for certain securities may also make
it more difficult for the Fund to obtain market quotations based on actual
trades for purposes of valuing the Fund's portfolio. The Fund, however, intends
to acquire liquid securities, though there can be no assurances that this will
be achieved.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase transactions, in which
the Fund purchases a U.S. government security subject to resale to a bank or
dealer at an agreed-upon price and date. The transaction requires the
collateralization of the seller's obligation by the transfer of securities with
an initial market value, including accrued interest, equal to at least 102% of
the dollar amount invested by the Fund in each agreement, with the value of the
underlying security marked to market daily to maintain coverage of at least
100%. A default by the seller might cause the Fund to experience a loss or delay
in the liquidation of the collateral securing the repurchase agreement. The Fund
might also incur disposition costs in liquidating the collateral. The Fund,
however, intends to enter into repurchase agreements only with financial
institutions such as broker-dealers and banks which are deemed creditworthy by
the Fund's investment manager. A repurchase agreement is deemed to be a loan by
the Fund under the 1940 Act. The U.S. government security subject to resale (the
collateral) will be held on behalf of the Fund by a custodian approved by the
Fund's Board and will be held pursuant to a written agreement.
BORROWING. The Fund does not borrow money or mortgage or pledge any of the
assets of the Fund, except that it may borrow for temporary or emergency
purposes in an amount up to 5% of its total asset value.
ILLIQUID INVESTMENTS. It is the policy of the Fund that illiquid securities
(securities that cannot be disposed of within seven days in the normal course of
business at approximately the amount at which the Fund has valued the
securities) may not constitute, at the time of purchase more than 10% of the
value of the total net assets of the Fund. Subject to this limitation, the
Fund's Board of Directors has authorized the Fund to invest in restricted
securities where such investment is consistent with the Fund's investment
objective and has authorized such securities to be considered to be liquid to
the extent the investment manager determines on a daily basis that there is a
liquid institutional or other market for such securities. Notwithstanding the
investment manager's determinations in this regard, the Fund's Board of
Directors will remain responsible for such determinations and will consider
appropriate action, consistent with the objective and policies of the Fund, if
the security should become illiquid subsequent to its purchase. To the extent
the Fund invests in restricted securities that are deemed liquid, the general
level of illiquidity in the Fund may be increased if qualified institutional
buyers become uninterested in purchasing these securities or the market for
these securities contracts. See "How Does the Fund Invest Its Assets?" and
"Investment Restrictions" in the SAI.
FOREIGN SECURITIES. The Fund may invest up to 25% of its assets in foreign
securities, providing such investments are consistent with its objective and
comply with its concentration and diversification policies. The Fund will
ordinarily purchase foreign securities which are traded in the U.S. or purchase
American Depositary Receipts ("ADRs"), which are certificates issued by U.S.
banks representing the right to receive securities of a foreign issuer deposited
with that bank or a correspondent bank. However, the Fund may also purchase the
securities of foreign issuers directly in foreign markets.
Investments in foreign securities where delivery takes place outside the U.S.
will be made in compliance with any applicable U.S. and foreign currency
restrictions and other tax laws and laws limiting the amount and types of
foreign investments. Changes of governmental administrations or of economic or
monetary policies, in the U.S. or abroad, or changed circumstances in dealings
between nations, or currency convertibility or exchange rates could result in
investment losses for the Fund.
Investment in the shares of foreign issuers requires consideration of certain
factors that are not normally involved in investments solely in U.S. issuers.
Among other things, the financial and economic policies of some foreign
countries in which the Fund may invest are not as stable as in the U.S.
Furthermore, foreign issuers are not generally subject to uniform accounting,
auditing and financial standards and requirements comparable to those applicable
to U.S. corporate issuers. There may also be less government supervision and
regulation of foreign securities exchanges, brokers and issuers than exist in
the U.S. Restrictions and controls on investment in the securities markets of
some countries may have an adverse effect on the availability and costs to the
Fund of investments in those countries. In addition, there may be the
possibility of expropriations, foreign withholding taxes, confiscatory taxation,
political, economic or social instability or diplomatic developments which could
affect assets of the Fund invested in issuers in foreign countries.
There may be less publicly available information about foreign issuers than is
contained in reports and reflected in ratings published for U.S. issuers. Some
foreign securities markets have substantially less volume than the New York
Stock Exchange (the "Exchange") and some foreign government securities may be
less liquid and more volatile than U.S. government securities. Transaction costs
on foreign securities exchanges may be higher than in the U.S., and foreign
securities settlements may, in some instances, be subject to delays and related
administrative uncertainties.
Investments may be in securities of foreign issuers, whether located in
developed or undeveloped countries, but investments will not be made in any
securities issued without stock certificates or comparable stock documents.
Securities which are acquired by the Fund outside the U.S. and which are
publicly traded in the U.S. or on a foreign securities exchange or in a foreign
securities market are not considered by the Fund to be illiquid assets so long
as the Fund acquires and holds the securities with the intention of reselling
them in the foreign trading market, the Fund reasonably believes it can readily
dispose of the securities for cash in the U.S. or foreign market and current
market quotations are readily available.
Foreign exchange gains and losses realized by the Fund in connection with
transactions involving foreign currencies, foreign currency payables or
receivables, and foreign currency-denominated debt securities are subject to
special tax rules which may cause such gains and losses to be treated as
ordinary income and losses rather than capital gains and losses and may affect
the amount and timing of the Fund's income or loss from such transactions and in
turn its distributions to shareholders. These rules are discussed in the SAI.
The holding of foreign securities, however, may be limited by the Fund to avoid
investment in certain Passive Foreign Investment Companies ("PFIC") and the
imposition of a PFIC tax on the Fund resulting from such investments.
The Fund is subject to a number of additional investment restrictions, some of
which may be changed only with the approval of shareholders, which limit its
activities to some extent. For a list of these restrictions and more information
concerning the policies discussed herein, please see "How Does the Fund Invest
Its Assets?" and "Investment Restrictions" in the SAI. There is, of course, no
assurance that the Fund's investment objectives described above will be met.
TRADE CLAIMS. The Fund may invest up to 5% of its assets in trade claims. Trade
claims are purchased from creditors of companies in financial difficulty. For
purchasers such as the Fund, trade claims offer the potential for profits since
they are often purchased at a significantly discounted value and, consequently,
may generate capital appreciation in the event that the value of the claim
increases as the debtor's financial position improves. In the event that the
debtor is able to pay the full obligation on the face of the claim as a result
of a restructuring or an improvement in the debtor's financial condition, trade
claims offer the potential for higher income due to the difference in the face
value of the claim as compared to the discounted purchase price.
An investment in trade claims is speculative and carries a high degree of risk.
There can be no guarantee that the debtor will ever be able to satisfy the
obligation on the trade claim. Trading in claims is not regulated by federal
securities laws or the SEC. Currently, trading in claims is regulated primarily
by bankruptcy laws. Because trade claims are unsecured, holders of trade claims
may have a lower priority in terms of payment than most other creditors in a
bankruptcy proceeding. In light of the nature and risk of trade claims, the
Fund's investment in these instruments will not exceed 5% of its net assets at
time of acquisition.
HOW YOU PARTICIPATE IN
THE RESULTS OF THE FUND'S ACTIVITIES
The assets of the Fund are invested in portfolio securities. If the securities
owned by the Fund increase in value, the value of the shares of the Fund which
you own will increase. If the securities owned by the Fund decrease in value,
the value of your shares will also decline. In this way, you participate in any
change in the value of the securities owned by the Fund.
In addition to the factors which affect the value of individual securities, as
described in the preceding sections, you may anticipate that the value of Fund
shares will fluctuate with movements in the broader equity and bond markets. To
the extent the Fund's investments consist of debt securities, changes in
interest rates will affect the value of the Fund's portfolio and thus its share
price. Increased rates of interest which frequently accompany higher inflation
and/or a growing economy are likely to have a negative effect on the value of
Fund shares. To the extent the Fund's investments consist of common stocks, a
decline in the market, expressed for example by a drop in the Dow Jones
Industrials or the Standard & Poor's 500 average or any other equity based
index, may also be reflected in declines in the Fund's share price. History
reflects both increases and decreases in the prevailing rate of interest and in
the valuation of the market, and these may reoccur unpredictably in the future.
A decline in the stock market of any country in which the Fund is invested may
also be reflected in a decline in the Fund's share price. Changes in currency
valuations will also affect the price of the Fund's shares. History reflects
both increases and decreases in the prevailing rate of interest and in worldwide
stock markets and currency valuations, and these may reoccur unpredictably in
the future. See also "What Are the Potential Risks Relating to High Yield
Securities?" below.
WHAT ARE THE POTENTIAL RISKS RELATING TO HIGH YIELD SECURITIES?
Corporate debt securities are subject to the risk of an issuer's inability to
meet principal and interest payments on the obligations (credit risk) and may
also be subject to price volatility due to such factors as interest rate
sensitivity, market perception of the creditworthiness of the issuer and general
market liquidity (market risk). Lower rated or unrated securities are more
likely to react to developments affecting market and credit risk than are more
highly rated securities, which react primarily to movements in the general level
of interest rates. The investment manager will consider both credit risk and
market risk in making investment decisions as to corporate debt obligations for
the Fund.
Because of the Fund's policy of investing in higher yielding, higher risk
securities, an investment in the Fund is accompanied by a higher degree of risk
than is present with an investment in higher rated, lower yielding securities.
Accordingly, an investment in the Fund should not be considered a complete
investment program and should be carefully evaluated for its appropriateness in
light of your overall investment needs and goals. If you are on a fixed income
or retired, you should also consider the increased risk of loss to principal
which is present with an investment in higher risk securities such as those in
which the Fund invests.
The market value of lower rated, fixed-income securities and unrated securities
of comparable quality, commonly known as junk bonds, tend to reflect individual
developments affecting the issuer to a greater extent than do higher rated
securities, which react primarily to fluctuations in the general level of
interest rates. Lower rated securities also tend to be more sensitive to
economic conditions than higher rated securities. These lower rated fixed-income
securities are considered by the rating agencies, on balance, to be
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation and will
generally involve more credit risk than securities in the higher rating
categories. Even bonds rated BBB by S&P or Baa by Moody's, ratings which are
considered investment grade, possess some speculative characteristics.
Issuers of high yielding, fixed-income securities are often highly leveraged and
may not have more traditional methods of financing available to them. Therefore,
the risk associated with acquiring the securities of such issuers is generally
greater than is the case with higher rated securities. For example, during an
economic downturn or a sustained period of rising interest rates, highly
leveraged issuers of high yielding securities may experience financial stress.
During these periods, such issuers may not have sufficient cash flow to meet
their interest payment obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific developments affecting
the issuer, the issuer's inability to meet specific projected business
forecasts, or the unavailability of additional financing. The risk of loss due
to default by the issuer may be significantly greater for the holders of high
yielding securities because such securities are generally unsecured and are
often subordinated to other creditors of the issuer. As of September 30, 1995, 3
issues out of 205 issues (excluding short-term securities and cash equivalents)
in the Fund's portfolio were in default. In the fiscal year ended September 30,
1995, 3 issues defaulted (from 3 separate issuers) and a total of 14 issues
defaulted over the prior three years, of which the Fund still holds the 3 issues
mentioned above. Defaulted issues represented 0.70% of the net assets of the
Fund at September 30, 1995. Current prices for defaulted bonds are generally
significantly lower than their purchase price, and the Fund may have unrealized
losses on such defaulted securities which are reflected in the price of the
Fund's shares. In general, securities which default lose much of their value in
the time period prior to the actual default so that the Fund's net assets are
impacted prior to the default. The Fund may retain an issue which has defaulted
because such issue may present an opportunity for subsequent price recovery.
High yielding, fixed-income securities frequently have call or buy-back features
which permit an issuer to call or repurchase the securities from the Fund.
Although such securities are typically not callable for a period from three to
five years after their issuance, if a call were exercised by the issuer during
periods of declining interest rates, the Fund would likely have to replace such
called securities with lower yielding securities, thus decreasing the net
investment income to the Fund and dividends to shareholders. The premature
disposition of a high yielding security due to a call or buy-back feature, the
deterioration of the issuer's creditworthiness, or a default may also make it
more difficult for the Fund to manage the timing of its receipt of income, which
may have tax implications. The Fund may be required under the Internal Revenue
Code of 1986, as amended (the "Code") and U.S. Treasury regulations to accrue
income for income tax purposes on defaulted obligations and to distribute such
income to the Fund's shareholders even though the Fund is not currently
receiving interest or principal payments on such obligations. In order to
generate cash to satisfy any or all of these distribution requirements, the Fund
may be required to dispose of portfolio securities that it otherwise would have
continued to hold or to use cash flows from other sources such as the sale of
Fund shares.
The Fund may have difficulty disposing of certain high yielding securities
because there may be a thin trading market for a particular security at any
given time. The market for lower rated, fixed-income securities generally tends
to be concentrated among a smaller number of dealers than is the case for
securities which trade in a broader secondary retail market. Generally,
purchasers of these securities are predominantly dealers and other institutional
buyers, rather than individuals. To the extent the secondary trading market for
a particular high yielding, fixed-income security does exist, it is generally
not as liquid as the secondary market for higher rated securities. Reduced
liquidity in the secondary market may have an adverse impact on market price and
the Fund's ability to dispose of particular issues, when necessary, to meet the
Fund's liquidity needs or in response to a specific economic event, such as the
deterioration in the creditworthiness of the issuer. Reduced liquidity in the
secondary market for certain securities may also make it more difficult for the
Fund to obtain market quotations based on actual trades for purposes of valuing
the Fund's portfolio. Current values for these high yield issues are obtained
from pricing services and/or a limited number of dealers and may be based upon
factors other than actual sales. (See "How Are Fund Shares Valued?" in this
Prospectus and in the SAI.)
The Fund is authorized to acquire high yielding, fixed-income securities that
are sold without registration under the federal securities laws and therefore
carry restrictions on resale. While many recent high yielding securities have
been sold with registration rights, covenants and penalty provisions for delayed
registration, if the Fund is required to sell such restricted securities before
the securities have been registered, it may be deemed an underwriter of such
securities as defined in the Securities Act of 1933, which entails special
responsibilities and liabilities. The Fund may incur special costs in disposing
of such securities; however, the Fund will generally incur no costs when the
issuer is responsible for registering the securities.
The Fund may acquire high yielding, fixed-income securities during an initial
underwriting. Such securities involve special risks because they are new issues.
The Fund has no arrangement with its underwriters or any other person concerning
the acquisition of such securities, and the investment manager will carefully
review the credit and other characteristics pertinent to such new issues.
The high yield securities market is relatively new and much of its growth prior
to 1990 paralleled a long economic expansion. The recent recession disrupted the
market for high yielding securities and adversely affected the value of
outstanding securities and the ability of issuers of such securities to meet
their obligations. Those adverse effects may continue even as the economy
recovers. Factors adversely impacting the market value of high yielding
securities will adversely impact the Fund's net asset value. For example,
adverse publicity regarding lower rated bonds, which appeared during 1989 and
1990, along with highly publicized defaults of some high yield issuers, and
concerns regarding a sluggish economy which continued in 1993, depressed the
prices for many such securities. In addition, the Fund may incur additional
expenses to the extent it is required to seek recovery upon a default in the
payment of principal or interest on its portfolio holdings. The Fund will rely
on the investment manager's judgment, analysis and experience in evaluating the
creditworthiness of an issuer. In this evaluation, the investment manager will
take into consideration, among other things, the issuer's financial resources,
its sensitivity to economic conditions and trends, its operating history, the
quality of the issuer's management and regulatory matters.
The credit risk factors pertaining to lower rated securities also apply to lower
rated zero coupon, deferred interest and pay-in-kind bonds. Such bonds carry an
additional risk in that, unlike bonds which pay interest throughout the period
to maturity, the Fund will realize no cash until the cash payment date and, if
the issuer defaults, the Fund may obtain no return at all on its investment.
Zero coupon, deferred interest and pay-in-kind bonds involve additional special
considerations.
Zero coupon or deferred interest securities are debt obligations which do not
entitle the holder to any periodic payments of interest prior to maturity or a
specified date when the securities begin paying current interest (the "cash
payment date") and therefore are generally issued and traded at a discount from
their face amounts or par value. The discount varies depending on the time
remaining until maturity or cash payment date, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer. The
discount, in the absence of financial difficulties of the issuer, typically
decreases as the final maturity or cash payment date of the security approaches.
The market prices of zero coupon securities are generally more volatile than the
market prices of securities that pay interest periodically and are likely to
respond to changes in interest rates to a greater degree than do non-zero coupon
or deferred interest securities having similar maturities and credit quality.
Current federal income tax law requires that a holder of a zero coupon security
report as income each year the portion of the original issue discount on such
security that accrues that year, even though the holder receives no cash
payments of interest during the year.
Pay-in-kind bonds are securities which pay interest through the issuance of
additional bonds. The Fund will be deemed to receive interest over the life of
such bonds and be taxed as if interest were paid on a current basis, although no
cash interest payments are received by the Fund until the cash payment date or
until the bonds mature. Current federal income tax law requires that companies
such as the Fund, which seek to qualify for pass-through federal income tax
treatment as regulated investment companies, distribute at least 90% of their
investment company taxable income each year, including tax-exempt and non-cash
income. The Fund is not limited in the amount of its assets that may be invested
in such securities. The Fund, however, intends to continue to qualify as a
regulated investment company under the Code. Accordingly, during periods when
the Fund receives no cash interest payments on its zero coupon securities or
deferred interest or pay-in-kind bonds, it will be required, in order to
maintain its desired tax treatment, to distribute cash approximating the income
attributable to such securities. Such distribution may require the sale of
portfolio securities to meet the distribution requirements and such sales may be
subject to the risk factors discussed above. Further information is included
under "How Taxation Affects You and the Fund."
ASSET COMPOSITION TABLE
A credit rating by a rating agency evaluates only the safety of principal and
interest of the bond, and does not consider the market value risk associated
with an investment in such a bond. The table below shows the percentage invested
in securities rated in each of the specific rating categories shown and those
that are not rated by the rating agency but deemed by the investment manager to
be of comparable credit quality. The information was prepared based on a dollar
weighted average of the Fund's portfolio composition based on month-end assets
for each of the 12 months in the fiscal year ended September 30, 1995. The
Appendix includes a description of each rating category.
MOODY'S RATING AVERAGE WEIGHTED
PERCENTAGE OF ASSETS
Aaa 9.59%
Aa 1.70%
A 0.01%
Baa 7.29%
Ba 4.55%
B 21.57%
Caa* 5.58%
Ca 0.77%
*1.55% of these securities, which are unrated by the rating agency, have been
included in the Caa category.
WHO MANAGES THE FUND?
The Board of Directors of the Custodian Funds (the "Board") has the primary
responsibility for the overall management of the Fund and for electing the
officers of the Fund who are responsible for administering its day-to-day
operations.
The Board has carefully reviewed the multiclass structure to ensure that no
material conflict exists between the two classes of shares. Although the Board
does not expect to encounter material conflicts in the future, the Board will
continue to monitor the Fund and will take appropriate action to resolve such
conflicts if any should arise.
In developing the multiclass structure the Fund has retained the authority to
establish additional classes of shares. It is the Fund's present intention to
offer only two classes of shares, but new classes may be offered in the future.
Franklin Advisers, Inc. ("Advisers" or "Manager") serves as the Fund's
investment manager. Advisers is a wholly-owned subsidiary of Franklin Resources,
Inc. ("Resources"), a publicly owned holding company, the principal shareholders
of which are Charles B. Johnson and Rupert H. Johnson, Jr., who own
approximately 20% and 16%, respectively, of Resources' outstanding shares.
Resources is engaged in various aspects of the financial services industry
through its subsidiaries (the "Franklin Templeton Group"). Advisers acts as
investment manager or administrator to 34 U.S. registered investment companies
(116 separate series) with aggregate assets of over $77 billion.
The team responsible for the day-to-day management of the Fund's portfolio
is: Mr. Charles B. Johnson since 1957 and Mr. Matt Avery since 1989.
Charles B. Johnson
Chairman of the Board
Franklin Advisers, Inc.
Mr. Johnson holds a Bachelor of Arts degree in economics and political
science from Yale University. He has been with Advisers or an affiliate since
1957. Mr. Johnson is a member of several securities industry-related
associations.
Matt Avery
Portfolio Manager
Franklin Advisers, Inc.
Mr. Avery hold a Master's Degree from the University of California at Los
Angeles' Graduate School of Management and a Bachelor of Science degree in
industrial engineering from Stanford University. He has been in the securities
industry since 1982 and with Advisers or an affiliate since 1987.
Pursuant to a management agreement, the Manager supervises and implements the
Fund's investment activities and provides certain administrative services and
facilities which are necessary to conduct the Fund's business.
During the fiscal year ended September 30, 1995, management fees totaling 0.46%
of the average monthly net assets of the Fund were paid to Advisers.
Among the responsibilities of the Manager under the management agreement is the
selection of brokers and dealers through whom transactions in the Fund's
portfolio securities will be effected. The Manager tries to obtain the best
execution on all such transactions. If it is felt that more than one broker is
able to provide the best execution, the Manager will consider the furnishing of
quotations and of other market services, research, statistical and other data
for the Manager and its affiliates, as well as the sale of shares of the Fund,
as factors in selecting a broker. Further information is included under "How
Does the Fund Purchase Securities For Its Portfolio?" in the SAI.
Shareholder accounting and many of the clerical functions for the Fund are
performed by Franklin/Templeton Investor Services, Inc. ("Investor Services" or
"Shareholder Services Agent"), in its capacity as transfer agent and
dividend-paying agent. Investor Services is a wholly-owned subsidiary of
Resources.
During the fiscal year ended September 30, 1995, expenses borne by Class I and
Class II shares of the Fund, including fees paid to Advisers and to Investor
Services, totaled 0.71% and 1.23%, respectively, of the average monthly net
assets of such class.
PLANS OF DISTRIBUTION
A separate plan of distribution has been approved and adopted for each class
("Class I Plan" and "Class II Plan", respectively, or "Plan(s)") pursuant to
Rule 12b-1 under the 1940 Act. The Rule 12b-1 fees charged to each class are
based solely on the distribution and, with respect to the Class II Plan,
servicing fees attributable to that particular class. Under either Plan, the
portion of fees remaining after payment to securities dealers or others for
distribution or servicing may be paid to Distributors for routine ongoing
promotion and distribution expenses incurred with respect to such class. Such
expenses may include, but are not limited to, the printing of prospectuses and
reports used for sales purposes, expenses of preparing and distributing sales
literature and related expenses, advertisements, and other distribution-related
expenses, including a prorated portion of Distributors' overhead expenses
attributable to the distribution of Fund shares.
The maximum amount which the Fund may reimburse to Distributors or others under
the Class I Plan for such distribution expenses is 0.15% per annum of Class I's
average daily net assets, payable on a quarterly basis. All expenses of
distribution in excess of 0.15% per annum will be borne by Distributors, or
others who have incurred them, without reimbursement from the Fund.
Under the Class II Plan, the Fund pays to Distributors distribution and related
expenses up to 0.50% per annum of Class II's daily net assets, payable
quarterly. Such fees may be used in order to compensate Distributors or others
for providing distribution and related services and bearing certain expenses of
the class. All expenses of distribution, marketing and related services over
that amount will be borne by Distributors or others who have incurred them,
without reimbursement by the Fund. In addition, the Class II Plan provides for
an additional payment by the Fund of up to 0.15% per annum of Class II's average
daily net assets as a servicing fee, payable quarterly. This fee will be used to
pay securities dealers or others for, among other things, assisting in
establishing and maintaining customer accounts and records; assisting with
purchase and redemption requests; receiving and answering correspondence;
monitoring dividend payments from the Fund on behalf of customers, or similar
activities related to furnishing personal services and/or maintaining
shareholder accounts.
Either Distributors or one of its affiliates may pay, from its own resources, a
commission of up to 1% of the amount invested to securities dealers who initiate
and are responsible for purchases of Class II shares. During the first year
following the purchase of Class II shares, Distributors will retain a portion of
Class II's Rule 12b-1 fees equal to .50% per annum of Class II's average daily
net assets to partially recoup fees Distributors pays to securities dealers in
connection with initial purchases of Class II shares.
Both Plans cover any payments to or by the Fund, Advisers, Distributors, or
other parties on behalf of the Fund, Advisers or Distributors, to the extent
such payments are deemed to be for the financing of any activity primarily
intended to result in the sale of shares issued by the Fund within the context
of Rule 12b-1. The payments under the Plans are included in the maximum
operating expenses which may be borne by each class of the Fund. For more
information, including a discussion of the Board of Directors' policies with
regard to the amount of each Plans fees, please see "The Fund's Underwriter" in
the SAI.
WHAT DISTRIBUTIONS MIGHT I RECEIVE FROM THE FUND?
You may receive two types of distributions from the Fund:
1. INCOME DIVIDENDS. The Fund receives income in the form of dividends, interest
and other income derived from its investments. This income, less the expenses
incurred in the Fund's operations, is its net investment income from which
income dividends may be distributed. Thus, the amount of dividends paid per
share may vary with each distribution.
2. CAPITAL GAIN DISTRIBUTIONS. The Fund may derive capital gains or losses in
connection with sales or other dispositions of its portfolio securities.
Distributions by the Fund derived from net short-term and net long-term capital
gains (after taking into account any net capital loss carryovers) may generally
be made once a year in December to reflect any net short-term and net long-term
capital gains realized by the Fund as of October 31 of the current fiscal year
and any undistributed net capital gains from the prior fiscal year. These
distributions, when made, will generally be fully taxable to the Fund's
shareholders. The Fund may make more than one distribution derived from net
short-term and net long-term capital gains in any year or adjust the timing of
these distributions for operational or other reasons.
DISTRIBUTIONS TO EACH CLASS OF SHARES
According to the requirements of the Code, dividends and capital gains will be
calculated and distributed in the same manner for Class I and Class II shares.
The per share amount of any income dividends will generally differ only to the
extent that each class is subject to different Rule 12b-1 fees.
DISTRIBUTION DATE
Although subject to change by the Board without prior notice to or approval by
shareholders, the Fund's current policy is to declare income dividends monthly
for shareholders of record on the last business day of the month, payable on or
about the 15th day of the following month. The Fund may determine to defer the
December 31st record date to a date shortly thereafter in January for tax or
other operational reasons. The amount of income dividend payments by the Fund is
dependent upon the amount of net income received by the Fund from its portfolio
holdings, is not guaranteed and is subject to the discretion of the Board. Fund
shares are quoted ex-dividend on the first business day following the record
date. THE FUND DOES NOT PAY "INTEREST" OR GUARANTEE ANY FIXED RATE OF RETURN ON
AN INVESTMENT IN ITS SHARES.
In order to be entitled to a dividend, you must have acquired Fund shares prior
to the close of business on the record date. If you are considering purchasing
Fund shares shortly before the record date of a distribution, you should be
aware that because the value of the Fund's shares is based directly on the
amount of its net assets, rather than on the principle of supply and demand, any
distribution of income or capital gain will result in a decrease in the value of
the Fund's shares equal to the amount of the distribution. While a dividend or
capital gain distribution received shortly after purchasing shares represents,
in effect, a return of a portion of your investment, it may be taxable as
dividend income or capital gain.
DISTRIBUTION OPTIONS
You may choose to receive your distributions from the Fund in any of these ways:
1.....PURCHASE ADDITIONAL SHARES OF THE FUND - You may purchase additional
shares of the same class of the Fund (without a sales charge or imposition of a
contingent deferred sales charge) by reinvesting capital gain distributions, or
both dividend and capital gain distributions. If you are a Class II shareholder,
you may also reinvest your distributions in Class I shares of the Fund. This is
a convenient way to accumulate additional shares and maintain or increase your
earnings base.
2.....PURCHASE SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
distributions to purchase the same class of shares of another Franklin Templeton
Fund (without a sales charge or imposition of a contingent deferred sales
charge). If you are a Class II shareholder, you may also direct your
distributions to purchase Class I shares of another Franklin Templeton Fund.
Many shareholders find this a convenient way to diversify their investments.
3.....RECEIVE DISTRIBUTIONS IN CASH - You may choose to receive dividends, or
both dividend and capital gain distributions in cash. You may have the money
sent directly to you, to another person, or to a checking account. If you choose
to send the money to a checking account, please see "Electronic Fund Transfers"
under "What Programs and Privileges Are Available to Me as a Shareholder?"
TO SELECT ONE OF THESE OPTIONS, PLEASE COMPLETE SECTIONS 6 AND 7 OF THE
SHAREHOLDER APPLICATION INCLUDED WITH THIS PROSPECTUS OR TELL YOUR INVESTMENT
REPRESENTATIVE WHICH OPTION YOU PREFER. IF NO OPTION IS SELECTED, DIVIDEND AND
CAPITAL GAIN DISTRIBUTIONS WILL BE AUTOMATICALLY REINVESTED IN THE SAME CLASS OF
THE FUND. You may change the distribution option selected at any time by
notifying the Fund by mail or by telephone. Please allow at least seven days
prior to the record date for the Fund to process the new option.
HOW TAXATION AFFECTS YOU AND THE FUND
The following discussion reflects some of the tax considerations that affect
mutual funds and their shareholders. For additional information on tax matters
relating to the Fund and its shareholders, see "Additional Information Regarding
Taxation" in the SAI.
The Fund intends to continue to qualify for treatment as a regulated investment
company under Subchapter M of the Code. By distributing all of its income and
meeting certain other requirements relating to the sources of its income and
diversification of its assets, the Fund will not be liable for federal income or
excise taxes.
For federal income tax purposes, any income dividends which the shareholder
receives from the Fund, as well as any distributions derived from the excess of
net short-term capital gain over net long-term capital loss, are treated as
ordinary income whether the shareholder has elected to receive them in cash or
in additional shares.
Distributions derived from the excess of net long-term capital gain over net
short-term capital loss are treated as long-term capital gain regardless of the
length of time the shareholder has owned Fund shares and regardless of whether
such distributions are received in cash or in additional shares.
For the fiscal year ended September 30, 1995, 27.99% of the income dividends
paid by the Fund qualified for the corporate dividends-received deduction,
subject to certain holding period and debt financing restrictions imposed under
the Code on the corporation claiming the deduction. These restrictions are
discussed in the SAI.
Pursuant to the Code, certain distributions which are declared in October,
November or December but which, for operational reasons, may not be paid to the
shareholder until the following January, will be treated for tax purposes as if
received by the shareholder on December 31 of the calendar year in which they
are declared.
Redemptions and exchanges of Fund shares are taxable events on which a
shareholder may realize a gain or loss. Any loss incurred on sale or exchange of
the Fund's shares, held for six months or less, will be treated as a long-term
capital loss to the extent of capital gain dividends received with respect to
such shares. All or a portion of the sales charge incurred in purchasing shares
of the Fund will not be included in the federal tax basis of such shares sold or
exchanged within ninety (90) days of their purchase (for purposes of determining
gain or loss with respect to such shares) if the sales proceeds are reinvested
in the Fund or in another fund in the Franklin Group of Funds or the Templeton
Group and a sales charge which would otherwise apply to the reinvestment is
reduced or eliminated. Any portion of such sales charge excluded from the tax
basis of the shares sold will be added to the tax basis of the shares acquired
in the reinvestment. Shareholders should consult with their tax advisor
concerning the tax rules applicable to the redemption or exchange of Fund
shares.
The Fund will inform shareholders of the source of their dividends and
distributions at the time they are paid and will, promptly after the close of
each calendar year, advise them of the tax status for federal income tax
purposes of such dividends and distributions.
Shareholders who are not U.S. persons for purposes of federal income taxation
should consult with their financial or tax advisors regarding the applicability
of U.S. withholding or other taxes to distributions received by them from the
Fund and the application of foreign tax laws to these distributions.
Shareholders should also consult their tax advisors with respect to the
applicability of any state and local intangible property or income taxes on
their shares of the Fund and distributions and redemption proceeds received from
the Fund.
Additional information on tax matters relating to the Fund and its shareholders
is included in the section entitled "Additional Information Regarding Taxation"
in the SAI.
HOW DO I BUY SHARES?
Shares of the Fund are continuously offered through securities dealers which
execute an agreement with Distributors. The use of the term "securities dealer"
shall include other financial institutions which, either directly or through
affiliates, have an agreement with Distributors to handle customer orders and
accounts with the Fund. Such reference, however, is for convenience only and
does not indicate a legal conclusion of capacity. The minimum initial investment
is $100 and subsequent investments must be $25 or more. These minimums may be
waived when the shares are purchased through plans established by the Franklin
Templeton Group. The Fund and Distributors reserve the right to refuse any order
for the purchase of shares.
DIFFERENCES BETWEEN CLASS I AND CLASS II
Class I and Class II shares differ in the amount of their front-end sales
charges and Rule 12b-1 fees, as well as the circumstances under which the
contingent deferred sales charge applies. Generally, Class I shares have higher
front-end sales charges than Class II shares and comparatively lower Rule 12b-1
fees. Voting rights of each class will be the same on matters affecting the Fund
as a whole, but each class will vote separately on matters affecting only
shareholders of that class See "General Information - Organization and Voting
Rights."
CLASS I. All Fund shares outstanding before the implementation of the multiclass
structure have been redesignated as Class I shares, and will retain their
previous rights and privileges. Class I shares are generally subject to a
variable sales charge upon purchase and may be purchased at a reduced front-end
sales charge or at net asset value if certain conditions are met. In most
circumstances, contingent deferred sales charges will not be assessed against
redemptions of Class I shares. Class I shares are subject to Rule 12b-1 fees of
up to a maximum of 0.15% per annum of the average daily net assets of the class.
See "Who Manages the Fund?," and "How Do I Sell Shares?" for more information.
CLASS II. Class II shares are subject to a front-end sales charge of 1% of the
amount invested and a contingent deferred sales charge of 1% if shares are
redeemed within 18 months of the calendar month of purchase. In addition, Class
II shares are subject to Rule 12b-1 fees of up to a maximum of 0.65% per annum
of the average daily net assets of Class II shares, 0.50% of which will be
retained by Distributors during the first year of investment.
DECIDING WHICH CLASS TO PURCHASE
You should carefully evaluate your anticipated investment amount and time
horizon prior to determining which class of shares to purchase. Generally, if
you expect to invest less than $100,000 in the Franklin Templeton Funds and to
make substantial redemptions within approximately six years or less of
investment, you should consider purchasing Class II shares. However, the higher
annual Rule 12b-1 fees on Class II shares will result in higher operating
expenses (which will accumulate over time to outweigh the difference in
front-end sales charges) and lower income dividends for Class II shares. For
this reason, Class I shares may be more attractive to you if you plan to invest
in the Fund over the long-term, even if no sales charge reductions are available
to you.
If you qualify to purchase Class I shares at reduced sales charges, you should
seriously consider purchasing Class I shares, especially if you intend to hold
your shares approximately six years or more. If you qualify to purchase Class I
shares at reduced sales charges but intend to hold your shares less than
approximately six years, you should evaluate whether it is more economical to
purchase Class I shares through a Letter of Intent or under Rights of
Accumulation or other means, rather than purchasing Class II shares. IF YOU ARE
INVESTING $1 MILLION OR MORE IN A SINGLE PAYMENT OR YOU QUALIFY TO PURCHASE
CLASS I SHARES AT NET ASSET VALUE YOU MAY NOT PURCHASE CLASS II SHARES. See
"Purchases at Net Asset Value" and "Description of Special Net Asset Value
Purchases" below for a discussion of when shares may be purchased at net asset
value.
Each class represents the same interest in the investment portfolio of the Fund
and has the same rights, except that each class has a different front-end sales
charge, bears the separate expenses of its Rule 12b-1 distribution plan, and has
exclusive voting rights with respect to such plan. The two classes also have
separate exchange privileges.
Purchases of Class II shares are limited to purchases below $1 million. Any
purchase of $1 million or more will automatically be invested in Class I shares,
since that is considered more beneficial to you. Such purchases, however, may be
subject to a contingent deferred sales charge. You may exceed $1 million in
Class II shares by cumulative purchases over a period of time. If you intend to
make investments exceeding $1 million, however, you should consider purchasing
Class I shares through a Letter of Intent instead of purchasing Class II shares.
Each class has a separate schedule for compensating securities dealers for
selling Fund shares. You should take all of the factors regarding an investment
in each class into account before deciding which class of shares to purchase.
There are no conversion features attached to either class of shares.
PURCHASE PRICE OF FUND SHARES
WHEN PLACING PURCHASE ORDERS, YOU SHOULD CLEARLY INDICATE WHICH CLASS OF SHARES
YOU INTEND TO PURCHASE. A PURCHASE ORDER THAT FAILS TO SPECIFY A CLASS WILL
AUTOMATICALLY BE INVESTED IN CLASS I SHARES.
Shares of both classes of the Fund are offered at their respective public
offering prices, which are determined by adding the net asset value per share
plus a front-end sales charge, next computed (1) after your securities dealer
receives the order which is promptly transmitted to the Fund or (2) after
receipt of an order by mail from you directly in proper form (which generally
means a completed Shareholder Application accompanied by a negotiable check).
CLASS I. The sales charge for Class I shares is a variable percentage of the
offering price depending upon the amount of the sale. The offering price will be
calculated to two decimal places using standard rounding criteria. A description
of the method of calculating net asset value per share is included under the
caption "How Are Fund Shares Valued?"
Set forth below is a table showing front-end sales charges and dealer
concessions for Class I shares.
TOTAL SALES CHARGE
DEALER
AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*
----------------- ----- -------- ------
Less than $100,000 4.25% 4.44% 4.00%
$100,000 but less than
$250,000 3.50% 3.63% 3.25%
$250,000 but less than
$500,000 2.75% 2.83% 2.50%
$500,000 but less than
$1,000,000 2.15% 2.20% 2.00%
$1,000,000 or more NONE NONE (see below)**
*Financial institutions or their affiliated brokers may receive an agency
transaction fee in the percentages indicated. At the discretion of Distributors,
all sales charges may at times be allowed to the securities dealer. Securities
dealers who receive 90% or more of a sales commission may be deemed to be an
underwriter under the Securities Act of 1933, as amended.
**The following commissions will be paid by Distributors, out of its own
resources, to securities dealers who initiate and are responsible for purchases
of $1 million or more: 0.75% on sales of $1 million but less than $2 million,
plus 0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales
of $3 million but less than $50 million, plus 0.25% on sales of $50 million but
less than $100 million, plus 0.15% on sales of $100 million or more. Dealer
concession breakpoints are reset every 12 months for purposes of additional
purchases.
No front-end sales charge applies on investments of $1 million or more, but a
contingent deferred sales charge of 1% is imposed on certain redemptions of
all or a portion of investments of $1 million or more within the contingency
period. See "How Do I Sell Shares? - Contingent Deferred Sales Charge."
The size of a transaction which determines the applicable sales charge on the
purchase of Class I shares is determined by adding the amount of your current
purchase plus the cost or current value (whichever is higher) of your existing
investments in one or more of the funds in the Franklin Group of Funds(R) and
the Templeton Group of Funds. Included for these aggregation purposes are (a)
the mutual funds in the Franklin Group of Funds except Franklin Valuemark Funds
and Franklin Government Securities Trust (the "Franklin Funds"), (b) other
investment products underwritten by Distributors or its affiliates, and (c) the
U.S. registered mutual funds in the Templeton Group of Funds except Templeton
Capital Accumulator Fund, Inc., Templeton Variable Annuity Fund, and Templeton
Variable Products Series Fund (the "Templeton Funds"). Franklin Funds and
Templeton Funds are collectively referred to as the "Franklin Templeton
Fund(s)." Sales charge reductions based upon aggregate holdings of (a), (b) and
(c) above ("Franklin Templeton Investments") may be effective only after
notification to Distributors that the investment qualifies for a discount.
OTHER PAYMENTS TO SECURITIES DEALERS. Either Distributors or one of its
affiliates, may make payments, out of its own resources, of up to 0.75% of the
amount purchased to securities dealers who initiate and are responsible for
purchases made at net asset value by certain designated retirement plans
(excluding IRA and IRA rollovers), certain non-designated plans, certain trust
companies and trust departments of banks and certain retirement plans of
organizations with collective retirement plan assets of $10 million or more. See
"Description of Special Net Asset Value Purchases" below and "How Do I Buy and
Sell Shares?" in the SAI.
CLASS II. Unlike Class I shares, the front-end sales charges and dealer
concessions for Class II shares do not vary depending on the amount of purchase,
as indicated in the table below:
DEALER
AS A CONCESSION
AS A PERCENTAGE AS A
PERCENTAGE OF NET PERCENTAGE
SIZE OF TRANSACTION OF OFFERING AMOUNT OF OFFERING
AT OFFERING PRICE PRICE INVESTED PRICE*
----------------- ----- -------- ------
any amount (less than $1
million) 1.00% 1.01% 1.00%
*Either Distributors or one of its affiliates, may make additional payments to
securities dealers, out of its own resources, of up to 1% of the amount
invested. During the first year following a purchase of Class II shares,
Distributors will keep a portion of the Rule 12b-1 fees assessed to those shares
to partially recoup fees Distributors pays to securities dealers.
Class II shares redeemed within 18 months of their purchase will be assessed a
contingent deferred sales charge of 1% on the lesser of the then-current net
asset value or the net asset value of such shares at the time of purchase,
unless such charge is waived as described under "How Do I Sell Shares? -
Contingent Deferred Sales Charge."
Either Distributors or one of its affiliates, out of its own resources, may also
provide additional compensation to securities dealers in connection with sales
of shares of the Franklin Templeton Funds. Compensation may include financial
assistance to securities dealers and payments made in connection with
conferences, sales or training programs for their employees, seminars for the
public, advertising, sales campaigns and/or shareholder services and programs
regarding one or more of the Franklin Templeton Funds and other dealer-sponsored
programs or events. In some instances, this compensation may be made available
only to certain securities dealers whose representatives have sold or are
expected to sell significant amounts of shares of the Franklin Templeton Funds.
Compensation may include payment for travel expenses, including lodging,
incurred in connection with trips taken by invited registered representatives
and members of their families to locations within or outside of the United
States for meetings or seminars of a business nature. Securities dealers may not
use sales of the Fund's shares to qualify for this compensation to the extent
such may be prohibited by the laws of any state or any self-regulatory agency,
such as the National Association of Securities Dealers, Inc. None of the
aforementioned additional compensation is paid for by the Fund or its
shareholders.
Additional terms concerning the offering of the Fund's shares are included in
the SAI under "How Do I Buy and Sell Shares?"
Certain officers and directors of the Fund are also affiliated with
Distributors. A detailed description is included under "Officers and Directors"
in the SAI.
QUANTITY DISCOUNTS IN SALES CHARGES -
CLASS I SHARES ONLY
Class I shares may be purchased under a variety of plans which provide for a
reduced sales charge. To be certain to obtain the reduction of the sales charge,
you or your securities dealer should notify Distributors at the time of each
purchase of shares which qualifies for the reduction. In determining whether a
purchase qualifies for a discount, an investment in any of the Franklin
Templeton Investments may be combined with those of your spouse, children under
the age of 21 and grandchildren under the age of 21. The value of Class II
shares you own may also be included for this purpose.
In addition, an investment in Class I shares may qualify for a reduction in the
sales charge under the following programs:
1. RIGHTS OF ACCUMULATION. The cost or current value (whichever is higher) of
existing investments in the Franklin Templeton Investments may be combined
with the amount of the current purchase in determining the sales charge to be
paid.
2. LETTER OF INTENT. You may immediately qualify for a reduced sales charge on a
purchase of Class I shares by completing the Letter of Intent section of the
Shareholder Application (the "Letter"). By completing the Letter, you (i)
express an intention to invest during the next 13 months a specified amount
which, if made at one time, would qualify for a reduced sales charge, (ii) grant
to Distributors a security interest in the reserved shares discussed below, and
(iii) irrevocably appoint Distributors as attorney-in-fact with full power of
substitution to surrender for redemption any or all shares for the purpose of
paying any additional sales charge due. Purchases under the Letter will conform
with the requirements of Rule 22d-1 under the 1940 Act. You or your securities
dealer must inform Investor Services or Distributors that this Letter is in
effect each time a purchase is made.
YOU ACKNOWLEDGE AND AGREE TO THE FOLLOWING PROVISIONS BY COMPLETING THE LETTER
OF INTENT SECTION OF THE SHAREHOLDER APPLICATION: Five percent (5%) of the
amount of the total intended purchase will be reserved in Class I shares
registered in your name, to assure that the full applicable sales charge will be
paid if the intended purchase is not completed. The reserved shares will be
included in the total shares owned as reflected on periodic statements. Income
and capital gain distributions on the reserved shares will be paid as you have
directed. You will not be able to dispose of the reserved shares until the
Letter has been completed or the higher sales charge paid. This policy of
reserving shares does not apply to certain benefit plans described under
"Description of Special Net Asset Value Purchases." For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
Although the sales charges on Class II shares cannot be reduced through these
programs, the value of Class II shares you own may be included in determining a
reduced sales charge to be paid on Class I shares pursuant to the Letter of
Intent and Rights of Accumulation programs.
GROUP PURCHASES OF CLASS I SHARES
If you are a member of a qualified group you may purchase Class I shares of the
Fund at the reduced sales charge applicable to the group as a whole. The sales
charge is based upon the aggregate dollar value of shares previously purchased
and still owned by the members of the group, plus the amount of the current
purchase. For example, if members of the group had previously invested and still
held $80,000 of Fund shares and now were investing $25,000, the sales charge
would be 3.50%. Information concerning the current sales charge applicable to a
group may be obtained by contacting Distributors.
A "qualified group" is one which (i) has been in existence for more than six
months, (ii) has a purpose other than acquiring Fund shares at a discount, and
(iii) satisfies uniform criteria which enable Distributors to realize economies
of scale in its costs of distributing shares. A qualified group must have more
than 10 members, be available to arrange for group meetings between
representatives of the Fund or Distributors and the members, agree to include
sales and other materials related to the Fund in its publications and mailings
to members at reduced or no cost to Distributors, and seek to arrange for
payroll deduction or other bulk transmission of investments to the Fund.
If you select a payroll deduction plan, subsequent investments will be automatic
and will continue until such time as you notify the Fund and your employer to
discontinue further investments. Due to the varying procedures used to prepare,
process and forward the payroll deduction information to the Fund, there may be
a delay between the time of the payroll deduction and the time the money reaches
the Fund. The investment in the Fund will be made at the offering price per
share determined on the day that both the check and payroll deduction data are
received in required form by the Fund.
PURCHASES AT NET ASSET VALUE
Class I shares may be purchased without the imposition of a front-end sales
charge ("net asset value") or a contingent deferred sales charge by (1)
officers, trustees, directors, and full-time employees of the Fund, any of the
Franklin Templeton Funds, or of the Franklin Templeton Group, and by their
spouses and family members, including subsequent investments made by such
parties after cessation of employment; (2) companies exchanging shares or
selling assets pursuant to a merger, acquisition or exchange offer; (3) accounts
managed by the Franklin Templeton Group; (4) certain unit investment trusts and
unit holders of such trusts reinvesting their distributions from the trusts in
the Fund; (5) registered securities dealers and their affiliates, for their
investment account only; (6) current employees of securities dealers and their
affiliates and by their family members, in accordance with the internal policies
and procedures of the employing securities dealer and affiliate; (7) insurance
company separate accounts for pension plan contracts; and (8) shareholders of
Templeton Institutional Funds, Inc. reinvesting redemption proceeds from that
fund under an employee benefit plan qualified under Section 401 of the Code, in
shares of the Fund.
For either Class I or Class II, the same class of shares of the Fund may be
purchased at net asset value by persons who have redeemed, within the previous
365 days, their shares of the Fund or another of the Franklin Templeton Funds
which were purchased with a front-end sales charge or assessed a contingent
deferred sales charge on redemption. IF A DIFFERENT CLASS OF SHARES IS
PURCHASED, THE FULL FRONT-END SALES CHARGE MUST BE PAID AT THE TIME OF PURCHASE
OF THE NEW SHARES. Under this privilege, you may reinvest an amount not
exceeding the redemption proceeds. While a credit will be given for any
contingent deferred sales charge paid on the shares redeemed and subsequently
repurchased, a new contingency period will begin. Matured shares will be
reinvested at net asset value and will not be subject to a new contingent
deferred sales charge. Shares of the Fund redeemed in connection with an
exchange into another fund (see "What If My Investment Outlook Changes? -
Exchange Privilege") are not considered "redeemed" for this privilege. In order
to exercise this privilege, a written order for the purchase of shares of the
Fund must be received by the Fund or the Fund's Shareholder Services Agent
within 365 days after the redemption. The 365 days, however, do not begin to run
on redemption proceeds placed immediately after redemption in a Franklin Bank
Certificate of Deposit ("CD") until the CD (including any rollover) matures.
Reinvestment at net asset value may also be handled by a securities dealer or
other financial institution, who may charge you a fee for this service. The
redemption is a taxable transaction but reinvestment without a sales charge may
affect the amount of gain or loss recognized and the tax basis of the shares
reinvested. If there has been a loss on the redemption, the loss may be
disallowed if a reinvestment in the same fund is made within a 30-day period.
Information regarding the possible tax consequences of such a reinvestment is
included in the tax section of this Prospectus and under "Additional Information
Regarding Taxation" in the SAI.
For either Class I or Class II, the same class of shares of the Fund or of
another of the Franklin Templeton Funds may be purchased at net asset value and
without a contingent deferred sales charge by persons who have received
dividends and capital gain distributions from investments in that class of
shares of the Fund within 365 days of the payment date of such distribution.
Class II shareholders may also direct such distributions for investment at net
asset value in a Class I Franklin Templeton Fund. To exercise this privilege, a
written request to reinvest the distribution must accompany the purchase order.
Additional information may be obtained from Shareholder Services at
1-800/632-2301. See "Distribution Options" under "What Distributions Might I
Receive from the Fund?"
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by investors who have, within the past 60
days, redeemed an investment in a mutual fund which is not part of the Franklin
Templeton Funds and which was subject to a front-end sales charge or a
contingent deferred sales charge and which has investment objectives similar to
those of the Fund.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by broker- dealers who have entered into a
supplemental agreement with Distributors, or by registered investment advisors
affiliated with such broker-dealers, on behalf of their clients who are
participating in a comprehensive fee program (sometimes known as a wrap fee
program).
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by anyone who has taken a distribution from
an existing retirement plan already invested in the Franklin Templeton Funds,
including former participants of the Franklin Templeton Profit Sharing 401(k)
plan, to the extent of such distribution. In order to exercise this privilege a
written order for the purchase of shares of the Fund must be received by
Franklin Templeton Trust Company (the "Trust Company"), the Fund or the Fund's
Shareholder Services Agent within 365 days after the plan distribution.
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by any state, county, or city,
or any instrumentality, department, authority or agency thereof which has
determined that the Fund is a legally permissible investment and which is
prohibited by applicable investment laws from paying a sales charge or
commission in connection with the purchase of shares of any registered
management investment company ("an eligible governmental authority"). SUCH
INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO DETERMINE WHETHER AND TO
WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
Municipal investors considering investment of proceeds of bond offerings into
the Fund should consult with expert counsel to determine the effect, if any, of
various payments made by the Fund or its investment manager on arbitrage rebate
calculations. In connection with investments by eligible governmental
authorities at net asset value made through a securities dealer who has executed
a dealer agreement with Distributors, either Distributors or one of its
affiliates may make a payment, out of its own resources, to such securities
dealer in an amount not to exceed 0.25% of the amount invested. Contact the
Franklin Templeton Institutional Services Department for additional information.
DESCRIPTION OF SPECIAL NET ASSET
VALUE PURCHASES
Class I shares may also be purchased at net asset value and without the
imposition of a contingent deferred sales charge by certain designated
retirement plans, including profit sharing, pension, 401(k) and simplified
employee pension plans ("designated plans"), subject to minimum requirements
with respect to number of employees or amount of purchase, which may be
established by Distributors. Currently, those criteria require that the employer
establishing the plan have 200 or more employees or that the amount invested or
to be invested during the subsequent 13-month period in the Fund or in any of
the Franklin Templeton Investments totals at least $1,000,000. Employee benefit
plans not designated above or qualified under Section 401 of the Code
("non-designated plans") may be afforded the same privilege if they meet the
above requirements as well as the uniform criteria for qualified groups
previously described under "Group Purchases of Class I Shares" which enable
Distributors to realize economies of scale in its sales efforts and sales
related expenses.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trust companies and bank trust departments
for funds over which they exercise exclusive discretionary investment authority
and which are held in a fiduciary, agency, advisory, custodial or similar
capacity. Such purchases are subject to minimum requirements with respect to the
amount to be purchased, which may be established by Distributors. Currently,
those criteria require that the amount invested or to be invested during the
subsequent 13-month period in the Fund or any of the Franklin Templeton
Investments must total at least $1,000,000. Orders for such accounts will be
accepted by mail accompanied by a check or by telephone or other means of
electronic data transfer directly from the bank or trust company, with payment
by federal funds received by the close of business on the next business day
following such order.
Class I shares may be purchased at net asset value and without the imposition of
a contingent deferred sales charge by trustees or other fiduciaries purchasing
securities for certain retirement plans of organizations with collective
retirement plan assets of $10 million or more, without regard to where such
assets are currently invested.
Please see "How Do I Buy and Sell Shares?" in the SAI for further information
regarding net asset value purchases of Class I shares.
HOW DO I BUY SHARES IN CONNECTION WITH TAX-DEFERRED RETIREMENT PLANS?
Shares of the Fund may be used for individual or employer-sponsored retirement
plans involving tax-deferred investments. The Fund may be used as an investment
vehicle for an existing retirement plan, or Trust Company may provide the plan
documents and serve as custodian or trustee. A plan document must be adopted in
order for a retirement plan to be in existence.
Trust Company, an affiliate of Distributors, can serve as custodian or trustee
for retirement plans. Brochures for the Trust Company plans contain important
information regarding eligibility, contribution and deferral limits and
distribution requirements. Please note that an application other than the one
contained in this Prospectus must be used to establish a retirement plan account
with the Trust Company. To obtain a retirement plan brochure or application,
call 1-800/DIAL BEN (1-800/342-5236).
Please see "How Do I Sell Shares?" for specific information regarding
redemptions from retirement plan accounts. Specific forms are required to be
completed for distributions from Trust Company retirement plans.
Individuals and plan sponsors should consult with legal, tax or benefits and
pension plan consultants before choosing a retirement plan. In addition,
retirement plan investors should consider consulting their investment
representatives or advisors concerning investment decisions within their plans.
GENERAL
Securities laws of states in which the Fund's shares are offered for sale may
differ from the interpretations of federal law, and banks and financial
institutions selling Fund shares may be required to register as dealers pursuant
to state law.
WHAT PROGRAMS AND PRIVILEGES ARE
AVAILABLE TO ME AS A SHAREHOLDER?
CERTAIN OF THE PROGRAMS AND PRIVILEGES DESCRIBED IN THIS SECTION MAY NOT BE
AVAILABLE DIRECTLY FROM THE FUND IF YOUR SHARES ARE HELD, OF RECORD, BY A
FINANCIAL INSTITUTION OR IN A "STREET NAME" ACCOUNT OR NETWORKED ACCOUNT THROUGH
THE NATIONAL SECURITIES CLEARING CORPORATION ("NSCC") (SEE "REGISTERING YOUR
ACCOUNT" IN THIS PROSPECTUS).
SHARE CERTIFICATES
Shares from an initial investment, as well as subsequent investments, including
the reinvestment of dividends and capital gain distributions, are generally
credited to an account in your name on the books of the Fund, without the
issuance of a share certificate. Maintaining shares in uncertificated form (also
known as "plan balance") minimizes the risk of loss or theft of a share
certificate. A lost, stolen or destroyed certificate cannot be replaced without
obtaining a sufficient indemnity bond. The cost of such a bond, which is
generally borne by you, can be 2% or more of the value of the lost, stolen or
destroyed certificate. A certificate will be issued if requested by you or your
securities dealer.
CONFIRMATIONS
A confirmation statement will be sent to you quarterly to reflect the dividends
reinvested during the period and after each other transaction which affects your
account. This statement will also show the total number of shares you own,
including the number of shares in "plan balance" for your account.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan offers a convenient way to invest in the Fund.
Under the plan, you can arrange to have money transferred automatically from
your checking account to the Fund each month to purchase additional shares. If
you are interested in this program, please refer to the Automatic Investment
Plan Application at the back of this Prospectus for the requirements of the
program or contact your investment representative. Of course, the market value
of the Fund's shares may fluctuate and a systematic investment plan such as this
will not assure a profit or protect against a loss. You may terminate the
program at any time by notifying Investor Services by mail or by phone.
SYSTEMATIC WITHDRAWAL PLAN
The Systematic Withdrawal Plan allows you to receive regular payments from your
account on a monthly, quarterly, semiannual or annual basis. To establish a
Systematic Withdrawal Plan, the value of your account must be at least $5,000
and the minimum payment amount for each withdrawal must be at least $50. Please
keep in mind that $50 is merely the minimum amount and is not a recommended
amount. For retirement plans subject to mandatory distribution requirements, the
$50 minimum will not apply.
If you would like to establish a Systematic Withdrawal Plan, please complete the
Systematic Withdrawal Plan section of the Shareholder Application included with
this Prospectus and indicate how you would like to receive your payments. You
may choose to receive your payments in any of the following ways:
1.....PURCHASE SHARES OF OTHER FRANKLIN TEMPLETON FUNDS - You may direct your
payments to purchase the same class of shares of another Franklin Templeton
Fund.
2.....RECEIVE PAYMENTS IN CASH - You may choose to receive your payments in
cash. You may have the money sent directly to you, to another person, or to a
checking account. If you choose to have the money sent to a checking account,
please see "Electronic Fund Transfers" below.
There are no service charges for establishing or maintaining a Systematic
Withdrawal Plan. Once your plan is established, any distributions paid by the
Fund will be automatically reinvested in your account. Payments under the plan
will be made from the redemption of an equivalent amount of shares in your
account, generally on the first business day of the month in which a payment is
scheduled. You will generally receive your payments within three to five days
after the shares are redeemed.
Redeeming shares through a Systematic Withdrawal Plan may reduce or exhaust the
shares in your account if payments exceed distributions received from the Fund.
This is especially likely to occur if there is a market decline. If a withdrawal
amount exceeds the value of your account, your account will be closed and the
remaining balance in your account will be sent to you. Redemptions under a
Systematic Withdrawal Plan are considered a sale for federal income tax
purposes. Because the amount withdrawn under the plan may be more than your
actual yield or income, part of the payment may be a return of your investment.
While a Systematic Withdrawal Plan is in effect, no share certificates will be
issued. You should ordinarily not make additional investments in the Fund of
less than $5,000 or three times the amount of annual withdrawals under the plan
because of the sales charge on additional purchases. Shares redeemed under the
plan may also be subject to a contingent deferred sales charge. Please see
"Contingent Deferred Sales Charge" under "How Do I Sell Shares?"
YOU MAY TERMINATE A SYSTEMATIC WITHDRAWAL PLAN, CHANGE THE AMOUNT AND SCHEDULE
OF WITHDRAWAL PAYMENTS, OR SUSPEND A PAYMENT BY NOTIFYING INVESTOR SERVICES IN
WRITING AT LEAST SEVEN BUSINESS DAYS PRIOR TO THE END OF THE MONTH PRECEDING A
SCHEDULED PAYMENT. THE FUND MAY ALSO TERMINATE A SYSTEMATIC WITHDRAWAL PLAN BY
NOTIFYING YOU IN WRITING AND WILL AUTOMATICALLY TERMINATE A SYSTEMATIC
WITHDRAWAL PLAN IF ALL SHARES IN YOUR ACCOUNT ARE WITHDRAWN OR IF THE FUND
RECEIVES NOTIFICATION OF THE SHAREHOLDER'S DEATH OR INCAPACITY.
ELECTRONIC FUND TRANSFERS
You may choose to have distributions from the Fund or payments under a
Systematic Withdrawal Plan sent directly to a checking account. If the checking
account is maintained at a bank that is a member of the Automated Clearing
House, the payments may be made automatically by electronic funds transfer. If
you choose this option, please allow at least fifteen days for initial
processing. Any payments made during that time will be sent to the address of
record on your account.
INSTITUTIONAL ACCOUNTS
There may be additional methods of purchasing, redeeming or exchanging shares
of the Fund available to institutional accounts. For further information,
contact the Franklin Templeton Institutional Services Department at
1-800/321-8563.
WHAT IF MY INVESTMENT OUTLOOK CHANGES? - EXCHANGE PRIVILEGE
The Franklin Templeton Funds consist of a number of mutual funds with various
investment objectives and policies. The shares of most of these funds are
offered to the public with a sales charge. If your investment objective or
outlook for the securities markets changes, Fund shares may be exchanged for the
same class of shares of other Franklin Templeton Funds which are eligible for
sale in your state of residence and in conformity with such fund's stated
eligibility requirements and investment minimums. Some funds, however, may not
offer Class II shares. Class I shares may be exchanged for Class I shares of any
of the other Franklin Templeton Funds. Class II shares may be exchanged for
Class II shares of any of the other Franklin Templeton Funds. No exchanges
between different classes of shares will be allowed. A contingent deferred sales
charge will not be imposed on exchanges. If, however, the exchanged shares were
subject to a contingent deferred sales charge in the original fund purchased and
shares are subsequently redeemed within the contingency period, a contingent
deferred sales charge will be imposed. Before making an exchange, you should
review the prospectus of the fund you wish to exchange from and the fund you
wish to exchange into for all specific requirements or limitations on exercising
the exchange privilege, for example, limitations on a fund's sale of its shares,
minimum holding periods for exchanges at net asset value, or applicable sales
charges.
YOU MAY EXCHANGE SHARES IN ANY OF THE FOLLOWING WAYS:
BY MAIL
Send written instructions signed by all account owners and accompanied by any
outstanding share certificates properly endorsed. The transaction will be
effective upon receipt of the written instructions together with any outstanding
share certificates.
BY TELEPHONE
YOU OR YOUR INVESTMENT REPRESENTATIVE OF RECORD, IF ANY, MAY EXCHANGE SHARES OF
THE FUND BY CALLING INVESTOR SERVICES AT 1-800/632-2301 OR THE AUTOMATED
FRANKLIN TELEFACTS(R) SYSTEM (DAY OR NIGHT) AT 1-800/247-1753. IF YOU DO NOT
WISH THIS PRIVILEGE EXTENDED TO A PARTICULAR ACCOUNT, YOU SHOULD NOTIFY THE FUND
OR INVESTOR SERVICES.
The telephone exchange privilege allows you to effect exchanges from the Fund
into an identically registered account of the same class of shares in one of the
other available Franklin Templeton Funds. The telephone exchange privilege is
available only for uncertificated shares or those which have previously been
deposited in your account. The Fund and Investor Services will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
Please see "Telephone Transactions - Verification Procedures."
During periods of drastic economic or market changes, it is possible that the
telephone exchange privilege may be difficult to implement and the TeleFACTS
option may not be available. In this event, you should follow the other exchange
procedures discussed in this section, including the procedures for processing
exchanges through securities dealers.
THROUGH SECURITIES DEALERS
As is the case with all purchases and redemptions of the Fund's shares, Investor
Services will accept exchange orders from securities dealers who execute a
dealer or similar agreement with Distributors. See also "By Telephone" above.
Such a dealer-ordered exchange will be effective only for uncertificated shares
on deposit in your account or for which certificates have previously been
deposited. A securities dealer may charge a fee for handling an exchange.
ADDITIONAL INFORMATION REGARDING EXCHANGES
Exchanges of the same class of shares are made on the basis of the net asset
value of the class involved, except as set forth below. Exchanges of shares of a
class which were purchased without a sales charge will be charged a sales charge
in accordance with the terms of the prospectus of the fund and the class of
shares being purchased, unless the original investment in the Franklin Templeton
Funds was made pursuant to the privilege permitting purchases at net asset
value, as discussed under "How Do I Buy Shares?" Exchanges of Class I shares of
the Fund which were purchased with a lower sales charge into a fund which has a
higher sales charge will be charged the difference, unless the shares were held
in the Fund for at least six months prior to executing the exchange.
If you request the exchange of the total value of your account, declared but
unpaid income dividends and capital gain distributions will be transferred to
the fund being exchanged into and will be invested at net asset value. Because
the exchange is considered a redemption and purchase of shares, you may realize
a gain or loss for federal income tax purposes. Backup withholding and
information reporting may also apply. Information regarding the possible tax
consequences of such an exchange is included in the tax section in this
Prospectus and under "Additional Information Regarding Taxation" in the SAI.
If a substantial portion of the Fund's shareholders should, within a short
period, elect to redeem their shares of the Fund pursuant to the exchange
privilege, the Fund might have to liquidate portfolio securities it might
otherwise hold and incur the additional costs related to such transactions. On
the other hand, increased use of the exchange privilege may result in periodic
large inflows of money. If this should occur, it is the general policy of the
Fund to initially invest this money in short-term, interest-bearing money market
instruments, unless it is felt that attractive investment opportunities
consistent with the Fund's investment objectives exist immediately.
Subsequently, this money will be withdrawn from such short-term money market
instruments and invested in portfolio securities in as orderly a manner as is
possible when attractive investment opportunities arise.
The exchange privilege may be modified or discontinued by the Fund at any time
upon 60 days' written notice to shareholders.
EXCHANGES OF CLASS I SHARES
The contingency period during which a contingent deferred sales charge may be
assessed for Class I shares will be tolled (or stopped) for the period such
shares are exchanged into and held in a Franklin or Templeton Class I money
market fund. If a Class I account has shares subject to a contingent deferred
sales charge, Class I shares will be exchanged into the new account on a
"first-in, first-out" basis. See "How Do I Sell Shares? - Contingent Deferred
Sales Charge" for a discussion of investments subject to a contingent deferred
sales charge.
EXCHANGES OF CLASS II SHARES
When an account is composed of Class II shares subject to the contingent
deferred sales charge and Class II shares that are not, the shares will be
transferred proportionately into the new fund. Shares received from reinvestment
of dividends and capital gains are referred to as "free shares," shares which
were originally subject to a contingent deferred sales charge but to which the
contingent deferred sales charge no longer applies are called "matured shares,"
and shares still subject to the contingent deferred sales charge are referred to
as "CDSC liable shares." CDSC liable shares held for different periods of time
are considered different types of CDSC liable shares. For instance, if you have
$1,000 in free shares, $2,000 in matured shares, and $3,000 in CDSC liable
shares and you exchange $3,000 into a new fund, $500 will be exchanged from free
shares, $1,000 from matured shares, and $1,500 from CDSC liable shares.
Similarly, if CDSC liable shares have been purchased at different periods, a
proportionate amount will be taken from shares held for each period. If, for
example, you hold $1,000 in shares bought 3 months ago, $1,000 bought 6 months
ago, and $1,000 bought 9 months ago and you exchange $1,500 into the new fund,
$500 from each of these shares will be deemed exchanged into the new fund.
The only money market fund exchange option available to Class II shareholders is
the Franklin Templeton Money Fund II ("Money Fund II"), a series of the Franklin
Templeton Money Fund Trust. No drafts (checks) may be written on Money Fund II
accounts, nor may you purchase shares of Money Fund II directly. Class II shares
exchanged for shares of Money Fund II will continue to age and a contingent
deferred sales charge will be assessed if CDSC liable shares are redeemed. Class
I shares may be exchanged for shares of any of the money market funds in the
Franklin Templeton Funds except Money Fund II. Draft writing privileges and
direct purchases are allowed on these other money market funds as described in
their respective prospectuses.
To the extent shares are exchanged proportionately, as opposed to another
method, such as first-in first-out, or free-shares followed by CDSC liable
shares, the exchanged shares may, in some instances, be CDSC liable even though
a redemption of such shares, as discussed elsewhere herein, may no longer be
subject to a contingent deferred sales charge. The proportional method is
believed by management to more closely meet and reflect the expectations of
Class II shareholders in the event shares are redeemed during the contingency
period. For federal income tax purposes, the cost basis of shares redeemed or
exchanged is determined under the Code without regard to the method of
transferring shares chosen by the Fund.
RETIREMENT PLAN ACCOUNTS
Franklin Templeton IRA and 403(b) retirement plan accounts may exchange
shares directly. Certain restrictions may apply, however, to other types of
retirement plans. See "Restricted Accounts" under "Telephone Transactions."
TIMING ACCOUNTS
Accounts which are administered by allocation or market timing services to
exchange shares based on predetermined market indicators ("Timing Accounts")
will be charged a $5.00 administrative service fee per each such exchange.
All other exchanges are without charge.
RESTRICTIONS ON EXCHANGES
In accordance with the terms of their respective prospectuses, certain funds do
not accept or may place differing limitations than those below on exchanges by
Timing Accounts.
The Fund reserves the right to temporarily or permanently terminate the exchange
privilege or reject any specific purchase order for any Timing Account or any
person whose transactions seem to follow a timing pattern who: (i) makes an
exchange request out of the Fund within two weeks of an earlier exchange request
out of the Fund, (ii) makes more than two exchanges out of the Fund per calendar
quarter, or (iii) exchanges shares equal in value to at least $5 million, or
more than 1% of the Fund's net assets. Accounts under common ownership or
control, including accounts administered so as to redeem or purchase shares
based upon certain predetermined market indicators, will be aggregated for
purposes of the exchange limits.
The Fund also reserves the right to refuse the purchase side of an exchange
request by any Timing Account, person, or group if, in the Manager's judgment,
the Fund would be unable to invest effectively in accordance with its investment
objectives and policies, or would otherwise potentially be adversely affected.
Your purchase exchanges may be restricted or refused if the Fund receives or
anticipates simultaneous orders affecting significant portions of the Fund's
assets. In particular, a pattern of exchanges that coincide with a "market
timing" strategy may be disruptive to the Fund and therefore may be refused.
The Fund and Distributors, as indicated under "How Do I Buy Shares?", reserve
the right to refuse any order for the purchase of shares.
TRANSFERS
Transfers between identically registered accounts in the same fund and class are
treated as non-monetary and non-taxable events and are not subject to a
contingent deferred sales charge. The transferred shares will continue to age
from the date of original purchase. Shares of each class will be transferred on
the same basis as described above for exchanges.
CONVERSION RIGHTS
It is not presently anticipated that Class II shares will be convertible to
Class I shares. You may, however, sell Class II shares and use the proceeds to
purchase Class I shares, subject to all applicable sales charges.
HOW DO I SELL SHARES?
You may liquidate your shares at any time and receive from the Fund the value of
the shares. YOU MAY REDEEM SHARES IN ANY OF THE FOLLOWING WAYS:
BY MAIL
Send a written request signed by all registered owners to Investor Services, at
the address shown on the back cover of this Prospectus, and any share
certificates which have been issued for the shares being redeemed, properly
endorsed and in order for transfer. You will then receive from the Fund the
value of the class of shares redeemed based upon the net asset value per share
(less a contingent deferred sales charge, if applicable) next computed after the
written request in proper form is received by Investor Services. Redemption
requests received after the time at which the net asset value is calculated will
receive the price calculated on the following business day. The net asset value
per share of each class is determined as of the scheduled close of the New York
Stock Exchange (the "Exchange")(generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. You are requested to provide a telephone
number where you may be reached during business hours, or in the evening if
preferred. Investor Services' ability to contact you promptly when necessary
will speed the processing of the redemption.
TO BE CONSIDERED IN PROPER FORM, SIGNATURES MUST BE GUARANTEED IF THE REDEMPTION
REQUEST INVOLVES ANY OF THE FOLLOWING:
(1) the proceeds of the redemption are over $50,000;
(2) the proceeds (in any amount) are to be paid to someone other than the
registered owners of the account;
(3) the proceeds (in any amount) are to be sent to any address other than the
address of record, preauthorized bank account or brokerage firm account;
(4) share certificates, if the redemption proceeds are in excess of $50,000;
or
(5) the Fund or Investor Services believes that a signature guarantee would
protect against potential claims based on the transfer instructions,
including, for example, when (a) the current address of one or more joint
owners of an account cannot be confirmed, (b) multiple owners have a
dispute or give inconsistent instructions to the Fund, (c) the Fund has
been notified of an adverse claim, (d) the instructions received by the
Fund are given by an agent, not the actual registered owner, (e) the Fund
determines that joint owners who are married to each other are separated or
may be the subject of divorce proceedings, or (f) the authority of a
representative of a corporation, partnership, association, or other entity
has not been established to the satisfaction of the Fund.
Signatures must be guaranteed by an "eligible guarantor institution" as defined
under Rule 17Ad-15 under the Securities Exchange Act of 1934. Generally,
eligible guarantor institutions include (1) national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
industrial loan companies and credit unions; (2) national securities exchanges,
registered securities associations and clearing agencies; (3) securities dealers
which are members of a national securities exchange or a clearing agency or
which have minimum net capital of $100,000; or (4) institutions that participate
in the Securities Transfer Agent Medallion Program ("STAMP") or other recognized
signature guarantee medallion program. A notarized signature will not be
sufficient for the request to be in proper form.
Where shares to be redeemed are represented by share certificates, the request
for redemption must be accompanied by the share certificate and a share
assignment form signed by the registered owners exactly as the account is
registered, with the signatures guaranteed as referenced above. You are advised,
for your protection, to send the share certificate and assignment form in
separate envelopes if they are being mailed in for redemption.
Liquidation requests of corporate, partnership, trust and custodianship
accounts, and accounts under court jurisdiction require the following
documentation to be in proper form:
Corporation - (1) Signature guaranteed letter of instruction from the authorized
officers of the corporation, and (2) a corporate resolution.
Partnership - (1) Signature guaranteed letter of instruction from a general
partner and (2) pertinent pages from the partnership agreement identifying the
general partners or a certification for a partnership agreement.
Trust - (1) Signature guaranteed letter of instruction from the trustees and (2)
a copy of the pertinent pages of the trust document listing the trustees or a
Certification for Trust if the trustees are not listed on the account
registration.
Custodial (other than a retirement account) - Signature guaranteed letter of
instruction from the custodian.
Accounts under court jurisdiction - Check court documents and applicable state
law since these accounts have varying requirements, depending upon the state of
residence.
Payment for redeemed shares will be sent to you within seven days after receipt
of the request in proper form.
BY TELEPHONE
If you complete the Franklin Templeton Telephone Redemption Authorization
Agreement (the "Agreement"), included with this Prospectus, you may redeem
shares of the Fund by telephone, subject to the Restricted Account exception
noted under "Telephone Transactions - Restricted Accounts." You may obtain
additional information about telephone redemptions by writing to the Fund or
Investor Services at the address shown on the cover or by calling
1-800/632-2301. THE FUND AND INVESTOR SERVICES WILL EMPLOY REASONABLE PROCEDURES
TO CONFIRM THAT INSTRUCTIONS GIVEN BY TELEPHONE ARE GENUINE. YOU, HOWEVER, BEAR
THE RISK OF LOSS IN CERTAIN CASES AS DESCRIBED UNDER "TELEPHONE TRANSACTIONS -
VERIFICATION PROCEDURES."
If your account has a completed Agreement on file, redemptions of uncertificated
shares or shares which have previously been deposited with the Fund or Investor
Services may be made for up to $50,000 per day per Fund account. Telephone
redemption requests received before the scheduled close of the Exchange
(generally 1:00 p.m. Pacific time) on any business day will be processed that
same day. The redemption check will be sent within seven days, made payable to
all the registered owners on the account, and will be sent only to the address
of record. Redemption requests by telephone will not be accepted within 30 days
following an address change by telephone. In that case, you should follow the
other redemption procedures set forth in this Prospectus. Institutional accounts
(certain corporations, bank trust departments, qualified retirement plans, and
government entities which qualify to purchase shares at net asset value pursuant
to the terms of this Prospectus) that wish to execute redemptions in excess of
$50,000 must complete an Institutional Telephone Privileges Agreement which is
available from the Franklin Templeton Institutional Services Department by
calling 1-800/321-8563.
THROUGH SECURITIES DEALERS
The Fund will accept redemption orders from securities dealers who have entered
into an agreement with Distributors. This is known as a repurchase. The only
difference between a normal redemption and a repurchase is that if you redeem
shares through a dealer, the redemption price will be the net asset value next
calculated after your dealer receives the order which is promptly transmitted to
the Fund, rather than on the day the Fund receives your written request in
proper form. The documents described under "By Mail" above, as well as a signed
letter of instruction are required regardless of whether you redeem shares
directly or submit such shares to a securities dealer for repurchase. Your
letter should reference the Fund and the class, the account number, the fact
that the repurchase was ordered by a dealer and the dealer's name. Details of
the dealer-ordered trade, such as trade date, confirmation number, and the
amount of shares or dollars, will help speed processing of the redemption. The
seven-day period within which the proceeds of your redemption will be sent will
begin when the Fund receives all documents required to complete ("settle") the
repurchase in proper form. The redemption proceeds will not earn dividends or
interest during the time between receipt of the dealer's repurchase order and
the date the redemption is processed upon receipt of all documents necessary to
settle the repurchase. Thus, it is in your best interest to have the required
documentation completed and forwarded to the Fund as soon as possible. Your
dealer may charge a fee for handling the order. See "How Do I Buy and Sell
Shares?" in the SAI for more information on the redemption of shares.
CONTINGENT DEFERRED SALES CHARGE
In order to recover commissions paid to securities dealers, all or a portion of
Class I investments of $1 million or more and any Class II investments redeemed
within the contingency period (12 months for Class I and 18 months for Class II)
will be assessed a contingent deferred sales charge, unless one of the
exceptions described below applies. The charge is 1% of the lesser of the value
of the shares redeemed (exclusive of reinvested dividends and capital gain
distributions) or the net asset value at the time of purchase of such shares,
and is retained by Distributors. The contingent deferred sales charge is waived
in certain instances.
In determining whether a contingent deferred sales charge applies, shares not
subject to a contingent deferred sales charge are deemed to be redeemed first,
in the following order: (i) a calculated number of shares representing amounts
attributable to capital appreciation of on shares held less than the contingency
period; (ii) shares purchased with reinvested dividends and capital gain
distributions; and (iii) other shares held longer than the contingency period.
Shares subject to a contingent deferred sales charge will then be redeemed on a
"first-in, first-out" basis. For tax purposes, a contingent deferred sales
charge is treated as either a reduction in redemption proceeds or an adjustment
to the cost basis of the shares redeemed.
The contingent deferred sales charge on each class of shares is waived, as
applicable, for: exchanges; any account fees; distributions to participants or
their beneficiaries in individual retirement plan accounts due to death,
disability or attainment of age 59 1/2; tax-free returns of excess contributions
from employee benefit plans; distributions from employee benefit plans,
including those due to termination or plan transfer; redemptions initiated by
the Fund due to an account falling below the minimum specified account size;
redemptions following the death of the shareholder or beneficial owner; and
redemptions through a Systematic Withdrawal Plan set up for shares prior to
February 1, 1995, and for Systematic Withdrawal Plans set up thereafter,
redemptions of up to 1% monthly of an account's net asset value (3% quarterly,
6% semiannually or 12% annually). For example, if a Class I account maintained
an annual balance of $1,000,000, only $120,000 could be withdrawn through a
once-yearly Systematic Withdrawal Plan free of charge. Any amount over that
$120,000 would be assessed a 1% contingent deferred sales charge. Likewise, if a
Class II account maintained an annual balance of $10,000, only $1,200 could be
withdrawn through a once-yearly Systematic Withdrawal Plan free of charge.
All investments made during a calendar month, regardless of when during the
month the investment occurred, will age one month on the last day of that month
and each subsequent month.
Unless otherwise specified, requests for redemptions of a SPECIFIED DOLLAR
amount will result in additional shares being redeemed to cover any applicable
contingent deferred sales charge, while requests for redemption of a SPECIFIC
NUMBER of shares will result in the applicable contingent deferred sales charge
being deducted from the total dollar amount redeemed.
ADDITIONAL INFORMATION REGARDING REDEMPTIONS
The Fund may delay the mailing of the redemption check, or a portion thereof,
until the clearance of the check used to purchase Fund shares, which may take up
to 15 days or more. Although the use of a certified or cashier's check will
generally reduce this delay, shares purchased with these checks will also be
held pending clearance. Shares purchased by federal funds wire are available for
immediate redemption. The right of redemption may be suspended or the date of
payment postponed if the Exchange is closed (other than customary closing) or
upon the determination of the SEC that trading on the Exchange is restricted or
an emergency exists, or if the SEC permits it, by order, for the protection of
shareholders. Of course, the amount received may be more or less than the amount
you invested, depending on fluctuations in the market value of securities owned
by the Fund.
RETIREMENT PLAN ACCOUNTS
Retirement plan account liquidations require the completion of certain
additional forms to ensure compliance with IRS regulations. To liquidate a
retirement plan account, you or your securities dealer may call Franklin's
Retirement Plans Department to obtain the necessary forms.
Tax penalties will generally apply to any distribution from such plans to a
participant under age 59 1/2, unless the distribution meets one of the
exceptions set forth in the Code.
OTHER INFORMATION
Distribution or redemption checks sent to you do not earn interest or any other
income during the time such checks remain uncashed and neither the Fund nor its
affiliates will be liable for any loss caused by your failure to cash such
checks.
"Cash" payments to or from the Fund may be made by check, draft or wire. The
Fund has no facility to receive, or pay out, cash in the form of currency.
For any information required about a proposed liquidation, you may call
Franklin's Shareholder Services Department. Securities dealers may call
Franklin's Dealer Services Department.
TELEPHONE TRANSACTIONS
By calling Investor Services at 1-800/632-2301, you or your investment
representative of record, if any, may be able to execute various telephone
transactions, including to: (i) effect a change in address, (ii) change a
dividend option (see "Restricted Accounts" below), (iii) transfer Fund shares in
one account to another identically registered account in the Fund, (iv) request
the issuance of certificates (to be sent to the address of record only) and (v)
exchange Fund shares as described in this Prospectus by telephone. In addition,
if you complete and file an Agreement as described under "How Do I Sell Shares?
- - By Telephone" you will be able to redeem shares of the Fund.
VERIFICATION PROCEDURES
The Fund and Investor Services will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. These will include:
recording all telephone calls requesting account activity by telephone,
requiring that the caller provide certain personal and/or account information
requested by the telephone service agent at the time of the call for the purpose
of establishing the caller's identification, and by sending a confirmation
statement on redemptions to the address of record each time account activity is
initiated by telephone. So long as the Fund and Investor Services follow
instructions communicated by telephone which were reasonably believed to be
genuine at the time of their receipt, neither they nor their affiliates will be
liable for any loss to you caused by an unauthorized transaction. The Fund and
Investor Services may be liable for any losses due to unauthorized or fraudulent
instructions in the event such reasonable procedures are not followed. You are,
of course, under no obligation to apply for or accept telephone transaction
privileges. In any instance where the Fund or Investor Services is not
reasonably satisfied that instructions received by telephone are genuine, the
requested transaction will not be executed, and neither the Fund nor Investor
Services will be liable for any losses which may occur because of a delay in
implementing a transaction.
RESTRICTED ACCOUNTS
Telephone redemptions and dividend option changes may not be accepted on
Franklin Templeton retirement accounts. To assure compliance with all applicable
regulations, special forms are required for any redemption, distribution or
dividend payment changes. While the telephone exchange privilege is extended to
Franklin Templeton IRA and 403(b) retirement accounts, certain restrictions may
apply to other types of retirement plans.
To obtain further information regarding distribution or transfer procedures,
including any required forms, retirement account shareholders may call to speak
to a Retirement Plan Specialist at 1-800/527-2020.
GENERAL
During periods of drastic economic or market changes, it is possible that the
telephone transaction privilege will be difficult to execute because of heavy
telephone volume. In such situations, you may wish to contact your investment
representative for assistance or send written instructions to the Fund as
detailed elsewhere in this Prospectus.
Neither the Fund nor Investor Services will be liable for any losses resulting
from your inability to execute a telephone transaction.
HOW ARE FUND SHARES VALUED?
The net asset value per share of each class of the Fund is determined as of the
scheduled close of the Exchange (generally 1:00 p.m. Pacific time) each day that
the Exchange is open for trading. Many newspapers carry daily quotations of the
prior trading day's closing "bid" (net asset value) and "ask" (offering price,
which includes the maximum front-end sales charge of each class of shares of the
Fund).
The net asset value per share of each class is determined by deducting the
aggregate gross value of all liabilities of each class from the aggregate gross
value of all assets of each class, and then dividing the difference by the
number of shares of the class outstanding. Assets in the Fund's portfolio are
valued as described under "How Are Fund Shares Valued?" in the SAI.
Each class will bear, pro rata, all of the common expenses of the Fund, except
that each class will bear the Rule 12b-1 fees payable under its respective plan.
The net asset value of all outstanding shares of each class of the Fund will be
computed on a pro rata basis based on the proportionate participation in the
Fund represented by the value of shares of such class. Due to the specific
distribution expenses and other costs that will be allocable to each class, the
dividends paid to each class of the Fund may vary.
HOW DO I GET MORE INFORMATION
ABOUT MY INVESTMENT?
Any questions or communications regarding your account should be directed to
Investor Services at the address shown on the back cover of this Prospectus.
From a touch-tone phone, you may access an automated system (day or night) which
offers the following features.
By calling the Franklin TeleFACTS(R) system at 1-800/247-1753, you may obtain
Class I and Class II account information, current price and, if available, yield
or other performance information specific to the Fund or any Franklin Templeton
Fund. In addition, Class I shareholders may process an exchange, within the same
class, into an identically registered Franklin account and request duplicate
confirmation or year-end statements and deposit slips.
Class I and Class II share codes for the Fund, which will be needed to access
system information, are 109 and 209, respectively. The system's automated
operator will prompt you with easy to follow step-by-step instructions from the
main menu. Other features may be added in the future.
To assist you and securities dealers wishing to speak directly with a
representative, the following list of Franklin departments, telephone numbers
and hours of operation is provided. The same numbers may be used when calling
from a rotary phone.
HOURS OF OPERATION
(MONDAY THROUGH
DEPARTMENT NAME TELEPHONE NO. FRIDAY)
Shareholder Services 1-800/632-2301 5:30a.m. to 5:00p.m.
Dealer Services 1-800/524-4040 5:30a.m. to 5:00p.m.
Fund Information 1-800/DIAL BEN 5:30a.m. to 8:00p.m.
8:30a.m. to 5:00p.m.
(Saturday)
Retirement Plans 1-800/527-2020 5:30a.m. to 5:00p.m.
TDD (hearing impaired) 1-800/851-0637 5:30a.m. to 5:00p.m.
In order to ensure that the highest quality of service is being provided,
telephone calls placed to or by representatives in Franklin's service
departments may be accessed, recorded and monitored. These calls can be
determined by the presence of a regular beeping tone.
HOW DOES THE FUND MEASURE PERFORMANCE?
Advertisements, sales literature and communications to you may contain several
measures of a class' performance, including current yield, various expressions
of total return and current distribution rate. They may also occasionally cite
statistics to reflect the Fund's volatility or risk.
Average annual total return figures as prescribed by the SEC represent the
average annual percentage change in value of $1,000 invested at the maximum
public offering price (offering price includes sales charge) for one-, five- and
ten-year periods, or portion thereof, to the extent applicable, through the end
of the most recent calendar quarter, assuming reinvestment of all distributions.
The Fund may also furnish total return quotations for each class for other
periods or based on investments at various sales charge levels or at net asset
value. For such purposes, total return equals the total of all income and
capital gain paid to shareholders, assuming reinvestment of all distributions,
plus (or minus) the change in the value of the original investment, expressed as
a percentage of the purchase price.
Current yield for each class reflects the income per share earned by the Fund's
portfolio investments. It is calculated for each class by dividing that class'
net investment income per share during a recent 30-day period by the maximum
public offering price for that class of shares on the last day of that period
and annualizing the result.
Current yield for each class, which is calculated according to a formula
prescribed by the SEC (see "General Information" in the SAI), is not indicative
of the dividends or distributions which were or will be paid to the Fund's
shareholders. Dividends or distributions paid to shareholders of a class are
reflected in the current distribution rate, which may be quoted to you. The
current distribution rate is computed by dividing the total amount of dividends
per share paid by a class during the past 12 months by a current maximum
offering price for that class of shares. Under certain circumstances, such as
when there has been a change in the amount of dividend payout or a fundamental
change in investment policies, it might be appropriate to annualize the
dividends paid during the period such policies were in effect, rather than using
the dividends during the past 12 months. The current distribution rate differs
from the current yield computation because it may include distributions to
shareholders from sources other than dividends and interest, such as premium
income from option writing and short-term capital gain, and is calculated over a
different period of time.
In each case, performance figures are based upon past performance, reflect all
recurring charges against a class' income and will assume the payment of the
maximum sales charge on the purchase of that class of shares. When there has
been a change in the sales charge structure, the historical performance figures
will be restated to reflect the new rate. The investment results of each class,
like all other investment companies, will fluctuate over time; thus, performance
figures should not be considered to represent what an investment may earn in the
future or what a class' total return, current yield or distribution rate may be
in any future period.
GENERAL INFORMATION
REPORTS TO SHAREHOLDERS
The Fund's fiscal year ends September 30. Annual Reports containing audited
financial statements of the Fund, including the auditors' report, and
Semi-Annual Reports containing unaudited financial statements are automatically
sent to shareholders. To reduce the volume of mail sent to one household, as
well as to reduce Fund expenses, Investor Services will attempt to identify
related shareholders within a household, and send only one copy of the report.
Additional copies may be obtained, without charge, upon request to the Fund at
the telephone number or address set forth on the cover page of this Prospectus.
Additional information on Fund performance is included in the Fund's Annual
Report to Shareholders and under "General Information" in the SAI.
ORGANIZATION AND VOTING RIGHTS
The authorized capital stock of the Custodian Funds consists of fourteen billion
shares of Capital Stock of $0.01 par value, all of which has been authorized by
the Board to be issued in five separate series, 7,000,000,000 of which have been
designated as Class I shares, and 7,000,000,000 of which have been designated as
Class II shares. Of those shares, 3,600,000,000 have been designated as Class I
shares of the Fund, and 3,600,000,000 have been designated as Class II shares of
the Fund. The Board is empowered by the Charter to issue other series of Capital
Stock and to increase or decrease the number, but not below that at the time
outstanding.
The assets received for the issue or sale of each series of the Capital Stock of
the Custodian Funds and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are especially allocated to such
series, and constitute the underlying assets of such series. The underlying
assets of each series are required to be segregated on the books of account, and
are to be charged with the liabilities in respect to such series and with a
share of the general liabilities of the Custodian Funds. Liabilities in respect
to any two or more series are to be allocated in proportion to the asset value
of the respective series except where direct expenses can otherwise be fairly
allocated. The Board has the right to determine which liabilities are allocable
to a given series, and which are general or allocable to two or more series. In
the event of the dissolution or liquidation of the Custodian Funds, the
registered holders of the Capital Stock of any series are entitled to receive as
a class the underlying assets of such series available for distribution to
shareholders.
Shares of Capital Stock entitle their holders to one vote per share; however,
votes are made by series on matters affecting an individual series. Shares have
noncumulative voting rights, which means that in all elections of directors,
holders of more than 50% of the shares voting can elect 100% of the directors,
if they choose to do so and, in such event, the holders of the remaining shares
voting will not be able to elect any person or persons to the Board. Shares have
no preemptive or subscription rights and are fully transferable. There are no
conversion rights; however, holders of shares of each class of any series may
reinvest all or any portion of the proceeds from the redemption or repurchase of
such shares into shares of the same class of any other series as described under
"What if My Investment Outlook Changes? - Exchange Privilege."
Shares of each class represent proportionate interests in the assets of the Fund
and have the same voting and other rights and preferences as the other class of
the Fund for matters that affect the Fund as a whole. For matters that only
affect a certain class of the Fund's shares, however, only shareholders of that
class will be entitled to vote. Therefore each class of shares will vote
separately on matters (1) affecting only that class, (2) expressly required to
be voted on separately by class by state corporation law, or (3) required to be
voted on separately by class by the 1940 Act, or the rules adopted thereunder.
For instance, if a change to the Rule 12b-1 plan relating to Class I shares
requires shareholder approval, only shareholders of Class I may vote on the
change to the Rule 12b-1 plan affecting that class. Similarly, if a change to
the Rule 12b-1 plan relating to Class II shares requires approval, only
shareholders of Class II may vote on changes to such plan. On the other hand, if
there is a proposed change to the investment objective of the Fund, the proposal
would affect all shareholders, regardless of which class of shares they hold
and, therefore, each share has the same voting rights.
SHAREHOLDERS' MEETINGS
Maryland General Corporation Law does not require corporations registered as
management investment companies under the 1940 Act to hold routine annual
meetings of shareholders and the Fund does not intend to hold annual meetings.
The Fund may, however, hold a meeting for such purposes as changing fundamental
investment restrictions, approving a new management agreement or any other
matters which are required to be acted on by shareholders under the 1940 Act. A
meeting may also be called by a majority of the Board or by shareholders holding
at least ten percent of the shares entitled to vote at the meeting for the
purpose of voting upon the removal of directors, in which case shareholders may
receive assistance in communicating with other shareholders in connection with
the election and removal of directors such as that provided in Section 16(c) of
the 1940 Act. In addition, Maryland General Corporation Law provides that a
special meeting may be called by a majority of the Board or by the written
request of shareholders holding at least 25% of the shares entitled to vote at
the meeting.
REDEMPTIONS BY THE FUND
The Fund reserves the right to redeem your shares, at net asset value, if your
account has a value of less than $50, but only where the value of your account
has been reduced by the prior voluntary redemption of shares and has been
inactive (except for the reinvestment of distributions) for a period of at least
six months, provided you are given advance notice. For more information, see
"How Do I Buy and Sell Shares?" in the SAI.
REGISTERING YOUR ACCOUNT
An account registration should reflect your intentions as to ownership. Where
there are two co-owners on the account, the account will be registered as "Owner
1" and "Owner 2"; the "or" designation is not used except for money market fund
accounts. If co-owners wish to have the ability to redeem or convert on the
signature of only one owner, a limited power of attorney may be used.
Accounts should not be registered in the name of a minor, either as sole or
co-owner of the account. Transfer or redemption for such an account may require
court action to obtain release of the funds until the minor reaches the legal
age of majority. The account should be registered in the name of one "Adult" as
custodian for the benefit of the "Minor" under the Uniform Transfer or Gifts to
Minors Act.
A trust designation such as "trustee" or "in trust for" should only be used if
the account is being established pursuant to a legal, valid trust document. Use
of such a designation in the absence of a legal trust document may cause
difficulties and require court action for transfer or redemption of the funds.
Shares, whether in certificate form or not, registered as joint tenants or "Jt
Ten" shall mean "as joint tenants with rights of survivorship" and not "as
tenants in common."
Except as indicated, you may transfer an account in the Fund carried in "street"
or "nominee" name by your securities dealer to a comparably registered Fund
account maintained by another securities dealer. Both the delivering and
receiving securities dealers must have executed dealer agreements on file with
Distributors. Unless a dealer agreement has been executed and is on file with
Distributors, the Fund will not process the transfer and will so inform your
delivering securities dealer. To effect the transfer, you should instruct the
securities dealer to transfer the account to a receiving securities dealer and
sign any documents required by the securities dealers to evidence consent to the
transfer. Under current procedures, the account transfer may be processed by the
delivering securities dealer and the Fund after the Fund receives authorization
in proper form from your delivering securities dealer. Account transfers may be
effected electronically through the services of the NSCC.
The Fund may conclusively accept instructions from you or your nominee listed in
publicly available nominee lists, regardless of whether the account was
initially registered in the name of or by you, your nominee, or both. If a
securities dealer or other representative is of record on your account, you will
be deemed to have authorized the use of electronic instructions on the account,
including, without limitation, those initiated through the services of the NSCC,
to have adopted as instruction and signature any such electronic instructions
received by the Fund and Investor Services, and to have authorized them to
execute the instructions without further inquiry. At the present time, such
services which are available include the NSCC's "Networking," "Fund/SERV," and
"ACATS" systems.
Any questions regarding an intended registration should be answered by the
securities dealer handling the investment or by calling Franklin's Fund
Information Department.
IMPORTANT NOTICE REGARDING
TAXPAYER IRS CERTIFICATIONS
Pursuant to the Code and U.S. Treasury regulations, the Fund may be required to
report to the IRS any taxable dividend, capital gain distribution, or other
reportable payment (including share redemption proceeds) and withhold 31% of any
such payments made to individuals and other non-exempt shareholders who have not
provided a correct taxpayer identification number ("TIN") and made certain
required certifications that appear in the Shareholder Application. You may also
be subject to backup withholding if the IRS or a securities dealer notifies the
Fund that the number furnished by you is incorrect or that you are subject to
backup withholding for previous under-reporting of interest or dividend income.
The Fund reserves the right to (1) refuse to open an account for any person
failing to provide a TIN along with the required certifications and (2) close an
account by redeeming its shares in full at the then-current net asset value upon
receipt of notice from the IRS that the TIN certified as correct by you is in
fact incorrect or upon the failure of a shareholder who has completed an
"awaiting TIN" certification to provide the Fund with a certified TIN within 60
days after opening the account.
APPENDIX
DESCRIPTION OF CORPORATE BOND RATINGS:
MOODY'S
AAA - Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
AA - Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large, fluctuation of protective elements may be of greater amplitude, or
there may be other elements present which make the long-term risks appear
somewhat larger.
A - Bonds rated A possess many favorable investment attributes and are
considered upper medium grade obligations. Factors giving security to principal
and interest are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
BAA - Bonds rated Baa are considered medium grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have speculative
characteristics as well.
BA - Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B - Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
CAA - Bonds rated Caa are of poor standing. Such issues may be in default or
there may be present elements of danger with respect to principal or interest.
CA - Bonds rated Ca represent obligations which are speculative in a high
degree. Such issues are often in default or have other marked shortcomings.
C - Bonds which are rated C are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
S&P
AAA - This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA - Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in small degree.
A - Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB - Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BB, B, CCC, CC - Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C - This rating is reserved for income bonds on which no interest is being paid.
D - Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
FRANKLIN
CUSTODIAN FUNDS, INC.
STATEMENT OF
ADDITIONAL INFORMATION
777 MARINERS ISLAND BLVD., P.O. BOX 7777
SAN MATEO, CA 94403-7777 1-800/DIAL BEN
FEBRUARY 1, 1996
CONTENTS PAGE
How Does the Fund Invest Its Assets?
Officers and Directors
Who Manages the Fund?
How Does the Fund Purchase Securities For Its Portfolio?
How Do I Buy and Sell Shares?
How Are Fund Shares Valued?
Additional Information
Regarding Taxation
The Fund's Underwriter
General Information
Financial Statements
There are three Prospectuses for Franklin Custodian Funds, Inc. (the "Fund");
one Prospectus covers all five Series of the Fund; one covers the Income Series
of the Fund; and one covers the U.S. Government Securities Series of the Fund.
Each is dated February 1, 1996, as each may be amended from time to time, and
provides the basic information you should know before investing in a Series of
the Fund. The Prospectuses may be obtained without charge from the Fund or from
it's principal underwriter, Franklin/Templeton Distributors, Inc.
("Distributors"), at the address or telephone number shown above.
THIS STATEMENT OF ADDITIONAL INFORMATION ("SAI") IS NOT A PROSPECTUS. IT
CONTAINS INFORMATION IN ADDITION TO AND IN MORE DETAIL THAN SET FORTH IN THE
PROSPECTUSES. THIS SAI IS INTENDED TO PROVIDE YOU WITH ADDITIONAL INFORMATION
REGARDING THE ACTIVITIES AND OPERATIONS OF THE FUND, AND SHOULD BE READ IN
CONJUNCTION WITH THE FUND'S PROSPECTUSES.
The Fund is an open-end management investment company, commonly called a "mutual
fund," and it has registered as such under the Investment Company Act of 1940
("1940 Act"). It was organized under the laws of Delaware in 1947 and
reincorporated under the laws of the state of Maryland in 1980. The Fund has
only one class of capital stock, which is issued in five separate diversified
series: Growth Series, DynaTech Series, Utilities Series, Income Series, and
U.S. Government Securities Series (individually or collectively referred to as
the "Series").
As explained in the Prospectus, the Growth Series, Utilities Series, Income
Series, and U.S. Government Securities Series offer two classes to their
investors: the Growth Series - Class I, Utilities Series - Class I, Income
Series - Class I, and U.S. Government Securities Series - Class I (individually
or collectively, "Class I") and the Growth Series - Class II, Utilities Series -
Class II, Income Series - Class II, and U.S. Government Securities Series -
Class II (collectively or individually, "Class II"). THE DYNATECH SERIES OFFERS
ONLY ONE CLASS OF SHARES ("DYNATECH SERIES - CLASS I) AND IS INCLUDED IN ALL
DISCUSSIONS OF CLASS I SHARES IN THIS PROSPECTUS.
HOW DOES THE FUND INVEST ITS ASSETS?
As noted in the Prospectuses, each Series has its own investment objective and
follows policies designed to achieve its objective. The investment objective(s)
of each Series as set forth in the Prospectuses are fundamental policies and may
not be changed without approval of the shareholders of the Series. In addition,
the following restrictions have been adopted as fundamental policies for all
Series, which means that they may not be changed without the approval of
shareholders. Each Series may not:
1. Borrow money or mortgage or pledge any of the assets of the Fund, except
that borrowings for temporary or emergency purposes may be made in an amount up
to 5% of total asset value.
2. Buy any securities on "margin" or sell any securities "short."
3. Lend any funds or other assets, except by the purchase of publicly
distributed bonds, debentures, notes, to-be-announced securities or other debt
securities and except that securities of any Series, other than the U.S.
Government Securities Series, may be loaned to broker-dealers or other
institutional investors as discussed below under "Loans of Portfolio
Securities." For additional information relating to this policy see discussions
under "Loan Participations" and limitations on illiquid securities under "Other
Policies."
4. Act as underwriter of securities issued by other persons except insofar as
the Fund may be technically deemed an underwriter under the federal securities
laws in connection with the disposition of portfolio securities.
5. Invest more than 5% of the value of the gross assets of a Series in the
securities of any one issuer, but this limitation does not apply to investments
in securities issued or guaranteed by the U.S. government or its
instrumentalities. (The Growth, DynaTech, Income and Utilities Series also have
policies that concentration of investments in a single industry may not exceed
25% of their assets, except that the Utilities Series will concentrate its
investments in the utilities industry.)
6. Purchase the securities of any issuer which would result in any Series
owning more than 10% of the outstanding voting securities of an issuer.
7. Purchase from or sell to its officers and directors, or any firm of which
any officer or director is a member, as principal, any securities, but may deal
with such persons or firms as brokers and pay a customary brokerage commission;
retain securities of any issuer if, to the knowledge of the Fund, one or more of
its officers, directors or investment advisor own beneficially more than
one-half of 1% of the securities of such issuer and all such officers and
directors together own beneficially more than 5% of such securities.
8. Purchase any securities issued by a corporation which has not been in
continuous operation for three years, but such period may include the operation
of a predecessor.
9. Acquire, lease or hold real estate except such as may be necessary or
advisable for the maintenance of its offices.
10. Invest in commodities and commodity contracts, puts, calls, straddles,
spreads or any combination thereof, or interests in oil, gas or other mineral
exploration or development programs. The Fund may, however, write covered call
options listed for trading on a national securities exchange and purchase call
options to the extent necessary to cancel call options previously written. At
the present, there are no options listed for trading on a national securities
exchange covering the types of securities which are appropriate for investment
by the U.S. Government Securities Series and, therefore, there are no option
transactions available for that Series.
11. Invest in companies for the purpose of exercising control or management.
12. Purchase securities of other investment companies; except to the extent each
Series invests its uninvested daily cash balances in shares of the Franklin
Money Fund and other money market funds in the Franklin Group of Funds provided
i) its purchases and redemptions of such money market fund shares may not be
subject to any purchase or redemption fees, ii) its investments may not be
subject to duplication of management fees, nor to any charge related to the
expense of distributing each Series' shares (as determined under Rule 12b-1, as
amended, under the federal securities laws) and iii) provided aggregate
investments by a Series in any such money market fund do not exceed (A) the
greater of (i) 5% of each Series' total net assets or (ii) $2.5 million, or (B)
more than 3% of the outstanding shares of any such money market fund.
In order to change any of the foregoing restrictions, approval must be obtained
from the stockholders of each Series that would be affected. Such approval
requires the affirmative vote of the lesser of (i) 67% or more of the voting
securities present at a meeting if the holders of more than 50% of voting
securities are represented at that meeting or (ii) more than 50% of the
outstanding voting securities.
In addition to these fundamental policies, it is the present policy of the Fund
(which may be changed without the approval of shareholders) not to invest in
real estate limited partnerships or in interests (other than publicly traded
equity securities) in oil, gas, or other mineral leases, exploration or
development programs.
To accomplish its objective(s), each Series follows certain investment policies,
as discussed in the Fund's Prospectuses. The following discussion contains
additional information regarding the investment policies in which each Series
may engage, except as otherwise indicated.
OPTION TRANSACTIONS - Subject to the conditions noted above, the Fund may write
covered call options which trade on national securities exchanges. Call options
written by the Fund give the holder the right to buy the underlying securities
from the Fund at a stated exercise price. A call option is "covered" if the
option writer owns the underlying security which is subject to the call.
The writer of an option receives a premium from the buyer, and retains the
premium whether or not the option expires unexercised. The premium paid by the
purchaser of an option will reflect, among other things, the relationship of the
exercise price to the market price and volatility of the underlying security,
the remaining term of the option, supply and demand and interest rates. If a
call option is exercised, the writer also experiences a profit or loss from the
sale of the underlying security. The writer of a call option may have no control
over when the underlying securities must be sold since, with regard to certain
options, the writer may be assigned an exercise notice at any time prior to the
termination of the obligation.
The Fund may terminate its obligation by effecting a "closing purchase
transaction." This is accomplished by buying an option identical to the option
previously written. However, a writer may not effect a closing purchase
transaction after being notified of the exercise of an option. There is no
guarantee that a closing purchase will be available to be effected at the time
desired by the Fund. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, it will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option; the Fund
will realize a loss from a closing transaction if the price of the transaction
is more than the premium received from writing the option. Because increases in
the market price of a call option will generally reflect increases in the market
price of the underlying security, any loss resulting from the repurchase of a
call option is likely to be offset in whole or in part by appreciation of the
underlying security owned by the Fund until the time of repurchase. Thereafter,
the Fund bears the risk of the security's rise or fall in market value unless it
sells the security.
The DynaTech and Growth Series may purchase put options to hedge against a
decline in the value of their portfolios. By using put options in this way, the
Series will reduce any profit it might otherwise have realized in the underlying
security by the amount of the premium paid for the put option, plus transaction
costs.
The Fund's manager does not currently intend to write options which would cause
the market value of any Series' open options to exceed 5% of that Series' total
net assets. There is no specific limitation on the Fund's ability to write
covered call options; however, as a practical matter, the Fund's option writing
activities may be limited by state or federal regulations. Among other things,
state regulations limit the aggregate value of securities underlying outstanding
options to 25% or less of net assets. As of the fiscal year ended September 30,
1995, there were no open options transactions in any Series. The U.S. Government
Securities Series does not presently engage in option transactions, as discussed
in restriction 10, above.
LOAN PARTICIPATIONS - The Income Series may invest up to 5% of its total assets
(at the time of investment) in loan participations, all of which may have
speculative characteristics. The Income Series may purchase loan participations
at par or which sell at a discount because of the borrower's credit problems. To
the extent the borrower's credit problems are resolved, the loan participation
may appreciate in value but not beyond par value.
The investment manager may acquire loan participations for the Income Series
from time to time when it believes the investments offer the possibility of
long-term appreciation in value. An investment in loan participations carries a
high degree of risk and may have the consequence that interest payments with
respect to such securities may be reduced, deferred, suspended or eliminated and
may have the further consequence that principal payments may likewise be
reduced, deferred, suspended or canceled, causing the loss of the entire amount
of the investment. Loans will generally be acquired by the Income Series from a
bank, finance company or other similar financial services entity ("Lender").
Loan participations are interests in floating or variable rate senior loans
("Loans") to U.S. corporations, partnerships and other entities ("Borrowers")
which operate in a variety of industries and geographical regions. Loans in
which the Income Series will purchase participation interests may pay interest
at rates which are periodically redetermined on the basis of a base lending rate
plus a premium. These base lending rates are generally the Prime Rate offered by
a major U.S. bank, the London Inter-Bank Offered Rate, the Certificate of
Deposit rate or other base lending rates used by commercial lenders. The Loans
typically have the most senior position in a Borrower's capital structure,
although some Loans may hold an equal ranking with other senior securities of
the Borrower. Although the Loans generally are secured by specific collateral,
the Income Series may invest in Loans which are not secured by any collateral.
Uncollateralized Loans pose a greater risk of nonpayment of interest or loss of
principal than do collateralized Loans. The collateral underlying a
collateralized Loan may consist of assets that may not be readily liquidated,
and there is no assurance that the liquidation of such assets would satisfy
fully a Borrower's obligations under a Loan. The Income Series is not subject to
any restrictions with respect to the maturity of the Loans in which it purchases
participation interests.
The Loans generally are not rated by nationally recognized statistical rating
organizations. Ratings of other securities issued by a Borrower do not
necessarily reflect adequately the relative quality of a Borrower's Loans.
Therefore, although the investment manager may consider such ratings in
determining whether to invest in a particular Loan, such ratings will not be the
determinative factor in the investment manager's analysis.
The Loans are not readily marketable and may be subject to restrictions on
resale. Participation interests in the Loans generally are not listed on any
national securities exchange or automated quotation system and no regular market
has developed for such interests. Any secondary purchases and sales of loan
participations generally are conducted in private transactions between buyers
and sellers. Many of the Loans in which the Income Series expects to purchase
interests are of a relatively large principal amount and are held by a
relatively large number of owners which, in the investment manager's opinion,
should enhance the relative liquidity of such interests.
When acquiring a loan participation, the Income Series will have a contractual
relationship only with the Lender (typically an entity in the banking, finance
or financial services industries), not with the Borrower. The Income Series has
the right to receive payments of principal and interest to which it is entitled
only from the Lender selling the loan participation and only upon receipt by
such Lender of such payments from the Borrower. In connection with purchasing
loan participations, the Income Series generally will have no right to enforce
compliance by the Borrower with the terms of the Loan Agreement, nor any rights
with respect to any funds acquired by other Lenders through set-off against the
Borrower, and the Fund may not directly benefit from the collateral supporting
the Loan in which it has purchased the loan participation. As a result, the
Income Series may assume the credit risk of both the Borrower and the Lender
selling the loan participation. In the event of the insolvency of the Lender
selling a loan participation, the Income Series may be treated as a general
creditor of such Lender, and may not benefit from any set-off between such
Lender and the Borrower.
Loans of Portfolio Securities - Consistent with procedures approved by the Board
of Directors and subject to various conditions which may be imposed from time to
time under various securities regulations, the Fund, other than the U.S.
Government Securities Series, may lend its portfolio securities to qualified
broker/dealers or other institutional investors provided that such loans do not
exceed 10% of the value of the Fund's total assets at the time of the most
recent loan. The borrower must deposit with the Fund's custodian collateral with
an initial market value of at least 102% of the initial market value of the
securities loaned, including any accrued interest, with the value of the
collateral and securities marked-to-market daily to maintain collateral coverage
of at least 100%. Such collateral shall consist of cash, securities issued by
the U.S. Government or its agencies or instrumentalities, or irrevocable letters
of credit. The lending of securities is a common practice in the securities
industry. The Fund will engage in security loan arrangements with the primary
objective of increasing the Fund's income through investment of the cash
collateral in short-term, interest-bearing obligations, but will do so only to
the extent that the Fund will not lose the tax treatment available to regulated
investment companies.
GNMA CERTIFICATES - Securities of the type to be included in the U.S. Government
Securities Series portfolio have historically involved little risk to principal
if held to maturity. However, due to fluctuations in interest rates, the market
value of such securities may vary during the period of a shareholder's
investment in the Series. The U.S. government has never defaulted and never
delayed payments of interest or principal on its obligations, however, this does
not guarantee the value of a shareholder's investment in the U.S. Government
Securities Series.
WHEN-ISSUED, DELAYED DELIVERY AND TBA TRANSACTIONS - The Income Series may
purchase debt obligations and the U.S. Government Series may purchase and sell
GNMA Certificates on a "when-issued", "delayed delivery" or "TBA" basis. These
transactions are arrangements under which either Series may purchase securities
with payment and delivery scheduled for a future time, generally within 30 to 60
days. These transactions are subject to market fluctuation and are subject to
the risk that the value or yields at delivery may be more or less than the
purchase price or the yields available when the transaction was entered into.
Although both Series will generally purchase these securities on a when-issued
or TBA basis with the intention of acquiring such securities, they may sell such
securities before the settlement date if it is deemed advisable. When a Series
is the buyer in such a transaction, it will maintain, in a segregated account
with its custodian bank, cash or high-grade marketable securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. To the extent the Series engages in when-issued, delayed delivery or
TBA transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with the Series' investment objectives and policies, and
not for the purpose of investment leverage. In when-issued, delayed delivery and
TBA transactions, the Series relies on the seller to complete the transaction.
The other party's failure to do so may cause the Series to miss a price or yield
considered advantageous. Securities purchased on a when-issued, delayed delivery
or TBA basis do not generally earn interest until their scheduled delivery date.
Neither Series is subject to any percentage limit on the amount of its assets
which may be invested in when-issued or TBA purchase obligations.
CREDIT UNION INVESTMENT REGULATIONS - This section summarizes the investment
policies of the U.S. Government Securities Series, under which, based on the
Fund's understanding of laws and regulations governing investments by federal
credit unions on September 30, 1995, this Series would be a permissible
investment for federal credit unions. CREDIT UNION INVESTORS ARE ADVISED TO
CONSULT THEIR OWN LEGAL ADVISERS TO DETERMINE WHETHER AND TO WHAT EXTENT THE
SHARES OF THE FUND CONSTITUTE LEGAL INVESTMENTS FOR THEM.
All investments of the U.S. Government Securities Series will be subject to the
following limitations:
(a) This Series will invest only in obligations of, or securities guaranteed as
to principal and interest by, the U.S. Government or its agencies and
instrumentalities, including without limitation GNMA certificates representing
proportional interests in pools of whole loans.
(b) All purchases and sales of securities will be settled on a cash basis within
30 days of the trade date. However, this Series may agree to settle a purchase
or sale transaction on a specific date up to 120 days after the trade date if,
on the trade date, the Series has cash flow projections evidencing its ability
to complete the purchase or the Series owns the security it has agreed to sell.
(c) This Series will not engage in repurchase agreements or reverse
repurchase agreements.
(d) This Series will not engage in (1) futures or options transactions; (2)
short sales; or (3) purchases of zero-coupon bonds which mature more than ten
years after the purchase date.
(e) This Series will not invest in derivative mortgage-backed securities, such
as collateralized mortgage obligations ("CMOs") and real estate mortgage
investment conduits ("REMICs"), which represent non-proportional interests
("tranches" or "classes") in pools of mortgage loans.
OTHER POLICIES - As discussed in the Prospectus, the Fund, other than the U.S.
Government Securities Series, may enter into "repurchase agreements" with banks
or with government securities dealers, recognized by the Federal Reserve Board
and which have been approved by the Board of Directors, who agree to repurchase
the securities at a predetermined price within a specified time (normally one
day to one week). In these transactions, the securities purchased by the Fund
have an initial total value in excess of the value of the repurchase agreement
and are held by the Fund's custodian bank until repurchased. Such arrangements
permit the Fund to keep all of its assets at work while retaining flexibility in
pursuit of investments of a longer-term nature. Repurchase agreements of more
than one week's duration are considered to be illiquid. The U.S. Government
Securities Series does not engage in repurchase agreements.
There are no restrictions or limitations on investments in obligations of the
U.S. government, or of corporations chartered by Congress as federal government
instrumentalities. The underlying assets may be retained in cash, including cash
equivalents which are Treasury bills, commercial paper and short-term bank
obligations such as certificates of deposit and bankers' acceptances. However,
it is intended that only as much of the underlying assets of each Series be
retained in cash as is deemed desirable or expedient under then-existing market
conditions.
The Fund, other than the U.S. Government Securities Series, may invest in
securities that cannot be offered to the public for sale without first being
registered under the Securities Act of 1933 ("restricted securities"), or in
other securities which, in the opinion of the Board of Directors, may be
otherwise illiquid. Illiquid equity securities will not be purchased if, upon
such purchase, such securities will constitute 5% of the value of the total net
assets of the Series in which they are held.
As noted in the Prospectuses, it is also the policy of the Fund that illiquid
securities may not constitute, at the time of purchase or at any time, more than
10% of the value of the total net assets of the Series in which they are held.
Generally an "illiquid security" is any security that cannot be disposed of
promptly and in the ordinary course of business at approximately the amount at
which the Fund has valued the instrument. The Fund's Board of Directors has
authorized the Fund to invest in restricted securities where such investment is
consistent with a Series' investment objective and has authorized such
securities to be considered to be liquid and thus not subject to the foregoing
limitation, to the extent the investment manager determines that there is a
liquid institutional or other market for such securities--for example,
restricted securities which may be freely transferred among qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as
amended, and for which a liquid institutional market has developed. The Board of
Directors will review any determination by the investment manager to treat a
restricted security as a liquid security on an ongoing basis, including the
investment manager's assessment of current trading activity and the availability
of reliable price information. In determining whether a restricted security is
properly considered a liquid security, the investment manager and the Board of
Directors will take into account the following factors: (i) the frequency of
trades and quotes for the security; (ii) the number of dealers willing to
purchase or sell the security and the number of other potential purchasers;
(iii) dealer undertakings to make a market in the security; and (iv) the nature
of the security and the nature of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers, and the mechanics
of transfer). To the extent a Series of the Fund invests in restricted
securities that are deemed liquid, the general level of illiquidity in that
Series of the Fund may be increased if qualified institutional buyers become
uninterested in purchasing these securities or the market for these securities
contracts.
WHEN WILL THE FUND ENGAGE
IN SECURITIES TRANSACTIONS?
It is intended that portfolio changes in the Growth, Utilities, Income and U.S.
Government Securities Series be made as infrequently as possible, consistent
with market and economic factors generally, and special considerations affecting
any particular security such as the limitation of loss or realization of price
appreciation at a time believed to be opportune. In the DynaTech Series,
investments will be made from time to time for the purpose of achieving
short-term trading profits, and it is contemplated that this will result in a
greater degree of portfolio turnover than characterizes the other Series. The
sale of securities held for relatively short periods and reinvestment of the
proceeds will result in increased brokerage and transaction costs to the Series
and may involve an increase in taxes to the shareholders.
The portfolio turnover rates for each Series are set forth below:
<TABLE>
<CAPTION>
PORTFOLIO TURNOVER
FOR FISCAL YEARS
ENDED SEPTEMBER 30
FUND 1994 1995
- ---- ---- ----
<S> <C> <C>
Growth Series 6.52% 1.39%
DynaTech Series 9.73% 9.84%
Utilities Series 6.34% 5.55%
Income Series 23.37% 58.64%
U.S. Government Securities Series 18.28% 5.48%
</TABLE>
OFFICERS AND DIRECTORS
The Board of Directors (the "Board") has the responsibility for the overall
management of the Fund, including general supervision and review of its
investment activities. The directors, in turn, elect the officers of the Fund
who are responsible for administering day-to-day operations of the Fund. The
affiliations of the officers and directors and their principal occupations for
the past five years are listed below. Directors who are deemed to be "interested
persons" of the Fund, as defined in the 1940 Act, are indicated by an asterisk
(*).
Harris J. Ashton (63)
General Host Corporation
Metro Center, 1 Station Place
Stamford, CT 06904-2045
Director
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers); Director, RBC Holdings, Inc. (a bank
holding company) and Bar-S Foods; and director, trustee or managing general
partner, as the case may be, of 56 of the investment companies in the Franklin
Templeton Group of Funds.
S. Joseph Fortunato (63)
Park Avenue at Morris County
P. O. Box 1945
Morristown, NJ 07962-1945
Director
Member of the law firm of Pitney, Hardin, Kipp & Szuch; Director of General Host
Corporation; director, trustee or managing general partner, as the case may be,
of 58 of the investment companies in the Franklin Templeton Group of Funds.
*Charles B. Johnson (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
President and Director
President and Director, Franklin Resources, Inc.; Chairman of the Board and
Director, Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc.;
Director, Franklin/Templeton Investor Services, Inc. and General Host
Corporation; and officer and/or director, trustee or managing general
partner, as the case may be, of most other subsidiaries of Franklin
Resources, Inc. and of 57 of the investment companies in the Franklin
Templeton Group of Funds.
*Rupert H. Johnson, Jr. (55)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Director
Executive Vice President and Director, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; President and Director, Franklin Advisers, Inc.;
Director, Franklin/Templeton Investor Services, Inc.; and officer and/or
director, trustee or managing general partner, as the case may be, of most other
subsidiaries of Franklin Resources, Inc. and of 43 of the investment companies
in the Franklin Templeton Group of Funds.
Gordon S. Macklin (67)
8212 Burning Tree Road
Bethesda, MD 20817
Director
Chairman, White River Corporation (information services); Director, Fund
American Enterprises Holdings, Inc., Lockheed Martin Corporation, MCI
Communications Corporation, MedImmune, Inc. (biotechnology), InfoVest
Corporation (information services), and Fusion Systems Corporation (industrial
technology); and director, trustee or managing general partner, as the case may
be, of 53 of the investment companies in the Franklin Templeton Group of Funds;
and formerly held the following positions: Chairman, Hambrecht and Quist Group;
Director, H & Q Healthcare Investors; and President, National Association of
Securities Dealers, Inc.
Harmon E. Burns (50)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Executive Vice President, Secretary and Director, Franklin Resources, Inc.;
Executive Vice President and Director, Franklin Templeton Distributors, Inc.;
Executive Vice President, Franklin Advisers, Inc.; Director, Franklin/Templeton
Investor Services, Inc.; officer and/or director, as the case may be, of other
subsidiaries of Franklin Resources, Inc.; and officer and/or director or trustee
of 43 of the investment companies in the Franklin Templeton Group of Funds.
Kenneth V. Domingues (63)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President - Financial Reporting and Accounting Standards
Senior Vice President, Franklin Resources, Inc., Franklin Advisers, Inc., and
Franklin Templeton Distributors, Inc.; officer and/or director, as the case may
be, of other subsidiaries of Franklin Resources, Inc.; and officer and/or
managing general partner, as the case may be, of 37 of the investment companies
in the Franklin Group of Funds.
Martin L. Flanagan (35)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President and Chief Financial Officer
Senior Vice President, Chief Financial Officer and Treasurer, Franklin
Resources, Inc.; Executive Vice President, Templeton Worldwide, Inc.; Senior
Vice President and Treasurer, Franklin Advisers, Inc. and Franklin Templeton
Distributors, Inc.; Senior Vice President, Franklin/Templeton Investor Services,
Inc.; officer of most other subsidiaries of Franklin Resources, Inc.; and
officer of 61 of the investment companies in the Franklin Templeton Group of
Funds.
Deborah R. Gatzek (47)
777 Mariners Island Blvd.
San Mateo, CA 94404
Vice President
Senior Vice President - Legal, Franklin Resources, Inc. and Franklin
Templeton Distributors, Inc.; Vice President, Franklin Advisers, Inc. and
officer of 37 of the investment companies in the Franklin Group of Funds.
Diomedes Loo-Tam (56)
777 Mariners Island Blvd.
San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Employee of Franklin Advisers, Inc.; and officer of 37 of the investment
companies in the Franklin Group of Funds.
Brian E. Lorenz (56)
One North Lexington Avenue
White Plains, New York 10001-1700
Secretary
Attorney, member of the law firm of Bleakley Platt & Schmidt; officer of three
of the investment companies in the Franklin Group of Funds.
The preceding table indicates those officers and directors who are also
affiliated persons of Distributors and Advisers. Directors not affiliated with
the investment manager ("nonaffiliated directors") are currently paid fees of
$1,350 per month plus $1,300 per meeting attended. As indicated above, certain
of the Fund's nonaffiliated directors also serve as directors, trustees or
managing general partners of other investment companies in the Franklin Group of
Funds(R) and the Templeton Group of Funds (the "Franklin Templeton Group of
Funds") from which they may receive fees for their services. The following table
indicates the total fees paid to nonaffiliated directors by the Fund and by
other funds in the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
NUMBER OF BOARDS IN
THE FRANKLIN
TOTAL FEES RECEIVED TEMPLETON GROUP OF
FROM THE FRANKLIN FUNDS ON WHICH EACH
TOTAL FEES TEMPLETON GROUP OF SERVES***
RECEIVED FROM FUNDS**
NAME FUND*
<S> <C> <C> <C>
Harris J. Ashton $31,800 $318,125 56
S. Joseph Fortunato 31,800 334,265 58
Gordon S. Macklin 31,800 301,885 53
* For the fiscal year ended September 30, 1995.
** For the calendar year ended December 31, 1994.
*** The number of boards is based on the number of registered investment
companies in the Franklin Templeton Group of Funds and does not include the
total number of series or funds within each investment company for which the
directors are responsible. The Franklin Templeton Group of Funds currently
includes 61 registered investment companies, consisting of approximately 162
U.S. based funds or series. </TABLE>
Nonaffiliated directors are reimbursed for expenses incurred in connection with
attending board meetings, paid pro rata by each fund in the Franklin Templeton
Group of Funds for which they serve as director, trustee or managing general
partner. No officer or director received any other compensation directly from
the Fund. Certain officers or directors who are shareholders of Franklin
Resources, Inc. may be deemed to receive indirect remuneration by virtue of
their participation, if any, in the fees paid to its subsidiaries. For
additional information concerning director compensation and expenses, please see
the Fund's Annual Report to Shareholders.
During the last fiscal year, the law firm of which Mr. Lorenz is a partner
received payments totaling $64,100 for legal services rendered.
As of November 3, 1995, the directors and officers, as a group, owned of record
and beneficially approximately 131,406 shares of Growth Series - Class I, 25,327
shares of Utilities Series - Class I, 31,820 shares of DynaTech Series, 53,595
shares of Income Series - Class I, 139,174 shares of U.S. Government Securities
Series - Class I or less than 1% of the total outstanding shares of each Series'
Class I shares. The directors and officers owned no Class II shares. Many of the
Fund's directors also own shares in various of the other funds in the Franklin
Templeton Group of Funds. Charles B. Johnson and Rupert H. Johnson, Jr. are
brothers.
From time to time, the number of Fund shares held in the "street name" accounts
of various securities dealers for the benefit of their clients or in centralized
securities depositories may exceed 5% of the total shares outstanding. To the
best knowledge of the Fund, no other person holds beneficially or of record more
than 5% of the Fund's outstanding shares.
WHO MANAGES THE FUND?
The investment manager of each Series of the Fund is Franklin Advisers, Inc.
("Advisers" or "Manager"). Advisers is a wholly-owned subsidiary of Resources, a
publicly owned holding company whose shares are listed on the New York Stock
Exchange ("Exchange"). Resources owns several other subsidiaries which are
involved in investment management and shareholder services.
Pursuant to the management agreement for each Series, the Manager provides
investment research and portfolio management services, including the selection
of securities for the Fund to purchase, hold or sell and the selection of
brokers through whom the Fund's portfolio transactions are executed. The
Manager's activities are subject to the review and supervision of the Board to
whom the Manager renders periodic reports of the each Series' investment
activities. Under the terms of the management agreement, the Manager provides
office space and office furnishings, facilities and equipment required for
managing the business affairs of the Fund; maintains all internal bookkeeping,
clerical, secretarial and administrative personnel and services; and provides
certain telephone and other mechanical services. The Manager is covered by
fidelity insurance on its officers, directors and employees for the protection
of the Fund. See the Statement of Operations in the financial statements
included in the Fund's Annual Report to Shareholders dated September 30, 1995.
Pursuant to the management agreement for each Series, the Fund is obligated to
pay the Manager a fee computed separately for each Series at the close of
business on the last business day of each month equal to a monthly rate of 5/96
of 1% (approximately 5/8 of 1% per year) for the first $100 million of net
assets of such Series; 1/24 of 1% (approximately 1/2 of 1% per year) on net
assets of such Series in excess of $100 million up to $250 million; 9/240 of 1%
(approximately 45/100 of 1% per year) of net assets of such Series from $250
million up to $10 billion; 11/300 of 1% (approximately 44/100 of 1% per year) of
net assets of such Series from $10 billion to $12.5 billion; 7/200 of 1%
(approximately 42/100 of 1% per year) of net assets of such Series from $12.5
billion to $15 billion; 1/30 of 1% (approximately 40/100 of 1%) of net assets of
such Series from $15 billion to $17.5 billion; 19/600 (approximately 38/100 of
1%) of net assets of such Series from $17.5 billion to $20 billion; and 3/100
(approximately 36/100 of 1%) of net assets of such Series above $20 billion. As
a result of the implementation of a plan of distribution adopted pursuant to
Rule 12b-1 under the 1940 Act (the "Plan"), Advisers has voluntarily agreed
effective May 1, 1994, to limit its fees for the U.S. Government Securities
Series - Class I to the extent overall expenses exceed 0.70% of average daily
net assets. The management agreement for each Series specifies that the
management fee will be reduced to the extent necessary to comply with the most
stringent limits on the expenses which may be borne by the Fund as prescribed by
any state in which the Fund's shares are offered for sale. The most stringent
current limit requires the Manager to reduce or eliminate its fee to the extent
that aggregate operating expenses of a Series (excluding interest, taxes,
brokerage commissions and extraordinary expenses such as litigation costs) would
otherwise exceed in any fiscal year 2 1/2% of the first $30 million of average
net assets of the Series, 2% of the next $70 million of average net assets of
the Series and 1 1/2% of average annual net assets of the Series in excess of
$100 million. Expense reductions have not been necessary based on state
limitation requirements.
Aggregate management fees for the five Series of the Fund for the fiscal years
ended September 30, 1993, 1994 and 1995, were as follows:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
- ---- ---- ---- ----
<S> <C> <C> <C>
Growth Series $ 2,855,536 $ 2,681,332 $ 2,969,094
DynaTech Series 441,449 424,859 491,673
Utilities series 13,422,576 13,930,637 12,223,592
Income Series 14,769,836 20,628,160 23,887,430
U.S. Government
Securities Series 62,607,011 58,414,490 50,269,876
</TABLE>
The management agreement for each Series is in effect until January 31, 1997.
Thereafter, each agreement may continue in effect for successive annual periods
providing such continuance is specifically approved at least annually by a vote
of the Board or by a vote of the holders of a majority of the Fund's outstanding
voting securities of each Series, and in either event by a majority vote of the
Fund's directors who are not parties to the management agreement or interested
persons of any such party (other than as directors of the Fund) ("Independent
Directors"), cast in person at a meeting called for that purpose. The management
agreement for each Series may be terminated without penalty at any time by the
Fund or by the Manager on 30 days' written notice and will automatically
terminate in the event of its assignment, as defined in the 1940 Act.
The Manager also provides management services to numerous other investment
companies or funds pursuant to management agreements with each fund. The Manager
may give advice and take action with respect to any of the other funds which it
manages, or for its own account, which may differ from action taken by the
Manager on behalf of the Fund. Similarly, the Manager is not obligated to
recommend, purchase or sell, or to refrain from recommending, purchasing or
selling, with respect to the Fund, any security which the Manager and "access
persons" as defined by the 1940 Act, may purchase or sell for its or their own
account(s) or for the accounts of any other fund; or from investing in
securities held by the Fund or other funds which it manages or administers. Of
course, any transactions for the accounts of the Manager and other "access
persons" will be made in compliance with the Fund's Code of Ethics.
Franklin/Templeton Investor Services, Inc. ("Investor Services" or "Shareholder
Services Agent"), a wholly-owned subsidiary of Resources, is the shareholder
servicing agent for the Fund and acts as the Fund's transfer agent and
dividend-paying agent. Investor Services is compensated on the basis of a fixed
fee per account.
Bank of America NT & SA, 555 California Street, 4th Floor, San Francisco,
California 94104, acts as custodian of the securities and other assets of the
Fund. Citibank Delaware, One Penn's Way, New Castle, Delaware 19720, acts as
custodian in connection with transfer services through bank automated clearing
houses. The custodians do not participate in decisions relating to the purchase
and sale of portfolio securities.
Coopers & Lybrand L.L.P., 333 Market Street, San Francisco, California 94105,
are the Fund's independent auditors. During the fiscal year ended September 30,
1995, their auditing services consisted of rendering an opinion on the financial
statements of the Fund included in the Fund's Annual Report to Shareholders
dated September 30, 1995.
The firm of Bleakley Platt & Schmidt, White Plains, New York, serves as legal
counsel to the Fund.
HOW DOES THE FUND PURCHASE SECURITIES FOR ITS PORTFOLIO?
Under the current management agreement with Advisers, the selection of
broker-dealers to execute transactions in each Series' portfolio is made by the
Manager in accordance with criteria set forth in the management agreement and
any directions which the Board may give.
When placing a portfolio transaction, the Manager attempts to obtain the best
net price and execution of the transaction. On portfolio transactions which are
done on a securities exchange, the amount of commission paid by the Fund is
negotiated between the Manager and the broker executing the transaction. The
Manager seeks to obtain the lowest commission rate available from brokers which
are felt to be capable of efficient execution of the transactions. The
determination and evaluation of the reasonableness of the brokerage commissions
paid in connection with portfolio transactions are based to a large degree on
the professional opinions of the persons responsible for the placement and
review of such transactions. These opinions are formed on the basis of, among
other things, the experience of these individuals in the securities industry and
information available to them concerning the level of commissions being paid by
other institutional investors of comparable size. The Manager will ordinarily
place orders for the purchase and sale of over-the-counter securities on a
principal rather than agency basis with a principal market maker unless, in the
opinion of the Manager, a better price and execution can otherwise be obtained.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask price. The Fund will seek to
obtain prompt execution of orders at the most favorable net price.
The amount of commission is not the only relevant factor to be considered in the
selection of a broker to execute a trade. If it is felt to be in the Fund's best
interests, the Manager may place portfolio transactions with brokers who provide
the types of services described below, even if it means the Fund will have to
pay a higher commission than would be the case if no weight were given to the
broker's furnishing of these services. This will be done only if, in the opinion
of the Manager, the amount of any additional commission is reasonable in
relation to the value of the services. Higher commissions will be paid only when
the brokerage and research services received are bona fide and produce a direct
benefit to the Fund or assist the Manager in carrying out its responsibilities
to the Fund, or when it is otherwise in the best interest of the Fund to do so,
whether or not such data may also be useful to the Manager in advising other
clients.
When it is felt that several brokers are equally able to provide the best net
price and execution, the Manager may decide to execute transactions through
brokers who provide quotations and other services to the Fund, specifically
including the quotations necessary to determine the value of the Fund's net
assets, in such amount of total brokerage as may reasonably be required in light
of such services, and through brokers who supply research, statistical and other
data to the Fund and Manager in such amount of total brokerage as may reasonably
be required.
It is not possible to place a dollar value on the special executions or on the
research services received by Advisers from dealers effecting transactions in
portfolio securities. The allocation of transactions in order to obtain
additional research services permits Advisers to supplement its own research and
analysis activities and to receive the views and information of individuals and
research staff of other securities firms. As long as it is lawful and
appropriate to do so, Advisers and its affiliates may use this research and data
in their investment advisory capacities with other clients. Provided that the
Fund's officers are satisfied that the best execution is obtained, the sale of
Fund shares may also be considered as a factor in the selection of securities
dealers to execute the Fund's portfolio transactions.
Because Distributors is a member of the National Association of Securities
Dealers, it is sometimes entitled to obtain certain fees when the Fund tenders
portfolio securities pursuant to a tender-offer solicitation. As a means of
recapturing brokerage for the benefit of the Fund, any portfolio securities
tendered by the Fund will be tendered through Distributors if it is legally
permissible to do so. In turn, the next management fee payable to Advisers under
the management agreement will be reduced by the amount of any fees received by
Distributors in cash, less any costs and expenses incurred in connection
therewith.
If purchases or sales of securities of the Fund and one or more other investment
companies or clients supervised by the Manager are considered at or about the
same time, transactions in such securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
Manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. It is recognized that in some cases this
procedure could possibly have a detrimental effect on the price or volume of the
security so far as the Fund is concerned. In other cases it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
During the fiscal years ended on September 30, 1995, each Series paid brokerage
commissions as follows:
<TABLE>
<CAPTION>
FUND 1993 1994 1995
- ---- ---- ---- ----
<S> <C> <C> <C>
Growth Series $ 175,563 $ 99,627 $ 50,102
DynaTech Series 30,033 11,863 1,025,293
Utilities Series 1,715,627 487,079 11,850
Income Series 814,753 1,223,298 895,111
U.S. Government -0- -0- -0-
Securities Series
</TABLE>
In the fiscal year ended September 30, 1995, the Income Series owned a security
issued by Associate Corp. of North America which was valued in the aggregate at
$19,964,400 as of the end of such fiscal year. Except as stated above, no Series
owned any securities issued by the Fund's regular broker-dealers as of the end
of such fiscal year.
HOW DO I BUY AND SELL SHARES?
All checks, drafts, wires and other payment mediums that you use for purchasing
or redeeming shares of the Fund must be denominated in U.S. dollars. The Fund
reserves the right, in its sole discretion, to either (a) reject any order for
the purchase or sale of shares denominated in any other currency, or (b) honor
the transaction or make adjustments to your account for the transaction as of a
date and with a foreign currency exchange factor determined by the drawee bank.
In connection with exchanges (see Prospectus "What if My Investment Outlook
Changes? - Exchange Privilege"), you should note that since the proceeds from
the sale of shares of an investment company generally are not available until
the fifth business day following the redemption, the fund into which you are
seeking to exchange reserves the right to delay issuing shares pursuant to an
exchange until said fifth business day. The redemption of shares of the Fund to
complete an exchange will be effected at the close of business on the day the
request for exchange is received in proper form at the net asset value then
effective.
The Fund may impose a $10 charge for each returned item, against any shareholder
account which, in connection with the purchase of Fund shares, submits a check
or a draft which is returned unpaid to the Fund.
Dividend checks which are returned to the Fund marked "unable to forward" by the
postal service will be deemed to be a request by the shareholder to change the
dividend option and the proceeds will be reinvested in additional shares at net
asset value until new instructions are received.
The Fund may deduct from your account the costs of its efforts to locate you if
mail is returned as undeliverable or the Fund is otherwise unable to locate you
or verify the current mailing address. These costs may include a percentage of
the account when a search company charges a percentage fee in exchange for its
location services.
Under agreements with certain banks in Taiwan, Republic of China, the Fund's
shares are available to such banks' discretionary trust funds at net asset
value. The banks may charge service fees to their customers who participate in
the discretionary trusts. Pursuant to agreements, a portion of such service fees
may be paid to Distributors, or an affiliate of Distributors, to help defray
expenses of maintaining a service office in Taiwan, including expenses related
to local literature fulfillment and communication facilities.
Shares of the Fund may be offered to investors in Taiwan through securities
firms known locally as Securities Investment Consulting Enterprises. In
conformity with local business practices in Taiwan, shares of each Series of the
Fund will be offered with the following schedule of sales charges:
SALES
SIZE OF PURCHASE IN U.S. DOLLARS CHARGE
Up to $100,000 3%
$100,000 to $1,000,000 2%
Over $1,000,000 1%
PURCHASES AND REDEMPTIONS
THROUGH SECURITIES DEALERS
Orders for the purchase of shares of any Series received in proper form prior to
the scheduled close of the Exchange (generally 1:00 p.m. Pacific time) any
business day that the Exchange is open for trading and promptly transmitted to
the Fund will be based upon the public offering price determined that day.
Purchase orders received by securities dealers or other financial institutions
after the scheduled close of the Exchange (generally 1:00 p.m. Pacific time)
will be effected at the public offering price for such Series on the day it is
next calculated. The use of the term "securities dealer" herein shall include
other financial institutions which either directly or through affiliates, have
an agreement with Distributors to handle customer orders and accounts with the
Fund. Such reference, however, is for convenience only and does not indicate a
legal conclusion of capacity.
Orders for the redemption of shares are effected at net asset value subject to
the same conditions concerning time of receipt in proper form. It is the
securities dealer's responsibility to transmit the order in a timely fashion and
any loss to the customer resulting from failure to do so must be settled between
the customer and the securities dealer.
ADDITIONAL INFORMATION REGARDING PURCHASES
SPECIAL NET ASSET VALUE PURCHASES. As discussed in the Prospectus under "How Do
I Buy Shares? - Description of Special Net Asset Value Purchases - Class I,"
certain categories of investors may purchase shares of a Series without a
front-end sales charge ("net asset value") or a contingent deferred sales
charge. Either Distributors or one of its affiliates may make payments, out of
its own resources, to securities dealers who initiate and are responsible for
such purchases, as indicated below. Distributors may make these payments in the
form of contingent advance payments, which may be recovered from the securities
dealer, or set off against other payments due to the securities dealer, in the
event of investor redemptions made within 12 months of the calendar month of
purchase. Other conditions may apply. All terms and conditions may be imposed by
an agreement between Distributors, or its affiliates, and the securities dealer.
The following amounts may be paid by Distributors or one of its affiliates, out
of its own resources, to securities dealers who initiate and are responsible for
(i) purchases of most equity and fixed income Franklin Templeton Funds made at
net asset value by certain designated retirement plans (excluding IRA and IRA
rollovers): 1.00% on sales of $1 million but less than $2 million, plus 0.80% on
sales of $2 million but less than $3 million, plus 0.50% on sales of $3 million
but less than $50 million, plus 0.25% on sales of $50 million but less than $100
million, plus 0.15% on sales of $100 million or more; and (ii) purchases of most
fixed income Franklin Templeton Funds made at net asset value by non-designated
retirement plans: 0.75% on sales of $1 million but less than $2 million, plus
0.60% on sales of $2 million but less than $3 million, plus 0.50% on sales of $3
million but less than $50 million, plus 0.25% on sales of $50 million but less
than $100 million, plus 0.15% on sales of $100 million or more. These payment
breakpoints are reset every 12 months for purposes of additional purchases. With
respect to purchases made at net asset value by certain trust companies and
trust departments of banks and certain retirement plans of organizations with
collective retirement plan assets of $10 million or more, Distributors, or one
of its affiliates, out of its own resources, may pay up to 1% of the amount
invested.
LETTER OF INTENT. You may qualify for a reduced sales charge on the purchase of
shares of the Fund, as described in the prospectus. At any time within 90 days
after the first investment which you want to qualify for the reduced sales
charge, a signed Shareholder Application, with the Letter of Intent ("Letter")
section completed, may be filed with the Fund. After the Letter is filed, each
additional investment will be entitled to the sales charge applicable to the
level of investment indicated on the Letter. Sales charge reductions based upon
purchases in more than one of the Franklin Templeton Funds will be effective
only after notification to Distributors that the investment qualifies for a
discount. Your holdings in the Franklin Templeton Funds, including Class II
shares, acquired more than 90 days before the Letter is filed will be counted
towards completion of the Letter but will not be entitled to a retroactive
downward adjustment in the sales charge. Any redemptions you make, other than by
a designated benefit plan, during the 13-month period will be subtracted from
the amount of the purchases for purposes of determining whether the terms of the
Letter have been completed. If the Letter is not completed within the 13-month
period, there will be an upward adjustment of the sales charge, depending upon
the amount actually purchased (less redemptions) during the period. The upward
adjustment does not apply to designated benefit plans. If you execute a Letter
prior to a change in the sales charge structure for the Fund you will be
entitled to complete the Letter at the lower of (i) the new sales charge
structure; or (ii) the sales charge structure in effect at the time the Letter
was filed with the Fund.
As mentioned in the Prospectus, five percent (5%) of the amount of the total
intended purchase will be reserved in shares of the Fund registered in your name
(except for designated benefit plans). If your total purchases, less
redemptions, equal the amount specified under the Letter, the reserved shares
will be deposited to an account in your name or delivered to you or as you
order. If your total purchases, less redemptions, exceed the amount specified
under the Letter and is an amount which would qualify for a further quantity
discount, a retroactive price adjustment will be made by Distributors and the
securities dealer through whom you made the purchases pursuant to the Letter (to
reflect such further quantity discount) on purchases made within 90 days before
and on those made after filing the Letter. The resulting difference in offering
price will be applied to the purchase of additional shares at the offering price
applicable to a single purchase or the dollar amount of the total purchases. If
your total purchases, less redemptions, are less than the amount specified under
the Letter, you will remit to Distributors an amount equal to the difference in
the dollar amount of sales charge you actually paid and the amount of sales
charge which would have applied to your aggregate purchases if your total
purchases had been made at a single time. Upon such remittance the reserved
shares held for your account will be deposited to an account in your name or
delivered to you or you order. If you have not paid the difference in sales
charge within 20 days after the written request is sent to you, the appropriate
number of reserved shares will be redeemed to realize such difference. In the
event that you redeem your total account prior to fulfillment of the Letter, the
additional sales charge due will be deducted from the proceeds of your
redemption, and the balance will be forwarded to you.
If you execute a Letter on behalf of a benefit plan (such plans are described
under "Purchases at Net Asset Value" in the Prospectus), the level and any
reduction in sales charge for these designated benefit plans will be based on
actual plan participation and the projected investments in the Franklin
Templeton Funds under the Letter. Benefit plans are not subject to the
requirement to reserve 5% of the total intended purchase, or to any penalty as a
result of the early termination of a plan, nor are benefit plans entitled to
receive retroactive adjustments in price for investments made before executing
the Letter.
REDEMPTIONS IN KIND
The Fund has committed itself to pay in cash (by check) all requests for
redemption by any shareholder of record, limited in amount, however, during any
90-day period to the lesser of $250,000 or 1% of the value of a Series' net
assets at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Securities and Exchange Commission ("SEC"). In the
case of requests for redemption in excess of such amounts, the directors reserve
the right to make payments in whole or in part in securities or other assets of
the Series from which the shareholder is redeeming, in case of an emergency, or
if the payment of such a redemption in cash would be detrimental to the existing
shareholders of the Series. In such circumstances, the securities distributed
would be valued at the price used to compute the Series' net assets. Should the
Fund do so, a shareholder may incur brokerage fees in converting the securities
to cash. The Fund does not intend to redeem illiquid securities in kind;
however, should it happen, you may not be able to timely recover your investment
and may also incur brokerage costs in selling such securities.
REDEMPTIONS BY THE FUND
Due to the relatively high cost of handling small investments, the Fund reserves
the right to redeem, involuntarily, at net asset value, your shares if your
account has a value of less than one-half of the initial minimum investment
required, but only where the value of your account has been reduced by your
prior voluntary redemption of shares. Until further notice, it is the present
policy of the Fund not to exercise this right with respect to you if your
account has a value of $50 or more. In any event, before the Fund redeems such
shares and sends the proceeds to you, it will notify you that the value of the
shares in your account is less than the minimum amount and allow you 30 days to
make an additional investment in an amount which will increase the value of your
account to at least $100.
CALCULATION OF NET ASSET VALUE
As noted in the Prospectuses, each Series generally calculates net asset value
as of the scheduled close of the Exchange (generally 1:00 p.m. Pacific time)
each day that the Exchange is open for trading. As of the date of this SAI, the
Fund is informed that the Exchange observes the following holidays: New Year's
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
For the purpose of determining the aggregate net assets of each Series, cash and
receivables are valued at their realizable amounts. Interest is recorded as
accrued and dividends are recorded on the ex-dividend date. Portfolio securities
listed on a securities exchange or on the NASDAQ National Market System for
which market quotations are readily available are valued at the last quoted sale
price of the day or, if there is no such reported sale, within the range of the
most recent quoted bid and ask prices. The value of a foreign security is
determined as of the close of trading on the foreign exchange on which it is
traded or as of the scheduled close of trading on the Exchange, if that is
earlier, and that value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at noon, New York time, on the day the value of
the foreign security is determined. If no sale is reported at that time, the
security is valued within the range of the most recent quoted bid and ask
prices. Occasionally, events which affect the values of foreign securities and
foreign exchange rates may occur between the times at which they are determined
and the close of the exchange and will, therefore, not be reflected in the
computation of each class of a Series' net asset value. If events materially
affect the value of these foreign securities occur during such period, then
these securities will be valued in accordance with procedures established by the
Board.
Over-the-counter portfolio securities are valued within the range of the most
recent quoted bid and ask price. Portfolio securities which are traded both in
the over-the-counter market and on a stock exchange are valued according to the
broadest and most representative market as determined by the Manager. Portfolio
securities underlying actively traded call options are valued at their market
price as determined above. The current market value of any option held by a
Series is its last sale price on the relevant exchange prior to the time when
assets are valued. Lacking any sales that day or if the last sale price is
outside the bid and ask prices, the options are valued within the range of the
current closing bid and ask prices if such valuation is believed to fairly
reflect the contract's market value. Other securities for which market
quotations are readily available are valued at the current market price, which
may be obtained from a pricing service, based on a variety of factors, including
recent trades, institutional size trading in similar types of securities
(considering yield, risk and maturity) and/or developments related to specific
issues. Securities and other assets for which market prices are not readily
available are valued at fair value as determined following procedures approved
by the Board. With the approval of directors, the Fund may utilize a pricing
service, bank or securities dealer to perform any of the above described
functions.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times prior to
the scheduled closing of the Exchange. The values of such securities used in
computing the net asset value of the Fund's shares are determined as of such
times. Occasionally, events affecting the values of such securities may occur
between the times at which they are determined and the scheduled closing of the
Exchange which will not be reflected in the computation of the Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities will be valued at their fair value as
determined in good faith by the Board.
REINVESTMENT DATE
Shares that you acquire through the reinvestment of dividends will be purchased
at the net asset value determined on the business day following the dividend
record date (sometimes known as "ex-dividend date"). The processing date for the
reinvestment of dividends may vary from month to month, and does not affect the
amount or value of the shares you acquire.
REPORTS TO SHAREHOLDERS
The Fund sends annual and semiannual reports to its shareholders regarding each
Series' performance and its portfolio holdings. If you would like to receive an
interim quarterly report you may phone Fund Information at 1-800/DIAL BEN.
SPECIAL SERVICES
The Franklin Templeton Institutional Services Department provides specialized
services, including recordkeeping, for institutional investors of the Fund.
The cost of these services is not borne by the Fund.
Investor Services may pay certain financial institutions which maintain omnibus
accounts with the Fund on behalf of numerous beneficial owners for recordkeeping
operations performed with respect to such beneficial owners. For each beneficial
owner in the omnibus account, the Fund may reimburse Investor Services an amount
not to exceed the per account fee which the Fund normally pays Investor
Services. Such financial institutions may also charge a fee for their services
directly to their clients.
ADDITIONAL INFORMATION REGARDING TAXATION
As stated in the Prospectus, each Series of the Fund has elected to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986 (the "Code"), qualified as such, and intends to continue to so
qualify. The Board reserves the right not to maintain the qualification of a
Series as a regulated investment company if they determine such course of action
to be beneficial to the shareholders. In such case, the Series will be subject
to federal and possibly state corporate taxes on its taxable income and gains,
and distributions to shareholders will be ordinary dividend income to the extent
of the Series' available earnings and profits.
Subject to the limitations discussed below, all or a portion of the income
distributions paid by a Series (with the exception of the U.S. Government
Securities Series) may be treated by corporate shareholders as qualifying
dividends for purposes of the dividends-received deduction under federal income
tax law. If the aggregate qualifying dividends received by the Series
(generally, dividends from U.S. domestic corporations, the stock in which is not
debt-financed by the Series and is held for at least a minimum holding period)
are less than 100% of its distributable income, then the amount of the Series'
dividends paid to corporate shareholders which may be designated as eligible for
such deduction will not exceed the aggregate qualifying dividends received by
the Series for the taxable year. The amount or percentage of income qualifying
for the corporate dividends-received deduction will be declared by the Series
annually in a notice to shareholders mailed shortly after the end of the Series'
fiscal year.
Corporate shareholders should note that dividends paid by a Series from sources
other than the qualifying dividends it receives will not qualify for the
dividends-received deduction. For example, any interest income and net
short-term capital gain (in excess of any net long-term capital loss or capital
loss carryover) included in investment company taxable income and distributed by
a Series as a dividend will not qualify for the dividends-received deduction.
Corporate shareholders should also note that availability of the corporate
dividends-received deduction is subject to certain restrictions. For example,
the deduction is eliminated unless the shares in a Series have been held (or
deemed held) for at least 46 days in a substantially unhedged manner. The
dividends-received deduction may also be reduced to the extent interest paid or
accrued by a corporate shareholder is directly attributable to its investment in
shares of a Series. The entire dividend, including the portion which is treated
as a deduction, is includable in the tax base on which the alternative minimum
tax is computed and may also result in a reduction in the shareholder's tax
basis in its shares of the Series, under certain circumstances, if the shares
have been held for less than two years. Corporate shareholders whose investment
in a Series is "debt financed" for these tax purposes should consult with their
tax advisors concerning the availability of the dividends-received deduction.
The Code requires all regulated investment companies to distribute at least 98%
of their taxable ordinary income earned during the calendar year and at least
98% of their capital gain net income earned during the 12-month period ending
October 31 of each year (in addition to amounts from the prior year that were
neither distributed, nor taxed to the Series) to shareholders by December 31 of
each year in order to avoid the imposition of a federal excise tax. Under these
rules, certain distributions which are declared in October, November or December
but which, for operational reasons, may not be paid to the shareholder until the
following January, will be treated for tax purposes as if paid by the Series and
received by the shareholder on December 31 of the calendar year in which they
are declared. Each Series intends as a matter of policy to declare and pay such
dividends, if any, in December to avoid the imposition of this tax, but does not
guarantee that its distributions will be sufficient to avoid any or all federal
excise taxes.
Each Series' transactions in options may be limited by the requirements for
qualification as a regulated investment company and may reduce the portion of
the Income Fund's dividends which is eligible for the corporate
dividends-received deduction. These transactions are subject to special tax
rules that may affect the amount, timing and character of certain distributions
to shareholders.
Gain realized by a Series from transactions entered into after April 30, 1993
that are deemed to constitute "conversion transactions" under the Code and which
would otherwise produce capital gain may be recharacterized as ordinary income
to the extent that such gain does not exceed an amount defined by the Code as
the "applicable imputed income amount." A conversion transaction is any
transaction in which substantially all of the Series' expected return is
attributable to the time value of the Series' net investment in such transaction
and any one of the following criteria are met: 1) there is an acquisition of
property with a substantially contemporaneous agreement to sell the same or
substantially identical property in the future; 2) the transaction is an
applicable straddle; 3) the transaction was marketed or sold to the Series on
the basis that it would have the economic characteristics of a loan but would be
taxed as capital gain; or 4) the transaction is specified in Treasury
regulations to be promulgated in the future. The applicable imputed income
amount, which represents the deemed return on the conversion transaction based
upon the time value of money, is computed using a yield equal to 120 percent of
the applicable federal rate, reduced by any prior recharacterizations under this
provision or Section 263(g) of the Code concerning capitalized carrying costs.
Redemptions and exchanges of shares of a Series are taxable transactions for
federal and state income tax purposes. For most shareholders, gain or loss will
be recognized in an amount equal to the difference between the shareholder's
basis in the shares and the amount realized from the transaction, subject to the
rules described below. If such shares are a capital asset in the hands of the
shareholder, gain or loss will be capital gain or loss and will be long-term for
federal income tax purposes if the shares have been held for more than one year.
All or a portion of the sales charge incurred in purchasing shares of the Fund
will not be included in the federal tax basis of such shares sold or exchanged
within ninety (90) days of their purchase (for purposes of determining gain or
loss with respect to such shares) if the sales proceeds are reinvested in the
Fund or in another fund in the Franklin Templeton Funds (defined under "How Do I
Buy Shares?" in the Prospectueses) and a sales charge which would otherwise
apply to the reinvestment is reduced or eliminated. Any portion of such sales
charge excluded from the tax basis of the shares sold will be added to the tax
basis of the shares acquired in the reinvestment. Shareholders should consult
with their tax advisor concerning the tax rules applicable to the redemption or
exchange of Fund shares.
All or a portion of a loss realized upon a redemption of shares will be
disallowed to the extent other shares of the Fund are purchased (through
reinvestment of dividends or otherwise) within 30 days before or after such
redemption. Any loss disallowed under these rules will be added to the tax basis
of the shares purchased.
Each Series, other than the U.S. Government Securities Series, may be subject to
foreign withholding taxes on income from certain of its foreign securities.
Because a Series generally has not invested and does not intend in the future to
invest more than 50% of its total assets in securities of foreign corporations,
it is not entitled under the Code to pass through to its shareholders their pro
rata share of the foreign taxes paid by each Series. These taxes will be taken
as a deduction by each Series.
Foreign exchange gains and losses realized by a Series (except for the U.S.
Government Securities Series) in connection with certain transactions involving
foreign currencies, foreign currency payables or receivables and foreign
currency-denominated debt securities are subject to special tax rules which may
cause such gains and losses to be treated as ordinary income and losses rather
than capital gains and losses and may affect the amount and timing of the
Series' income or loss from such transactions and in turn its distributions to
shareholders. Additionally, investments in foreign securities pose special
issues to the Series in meeting its asset diversification and income tests as a
regulated investment company. The Series will limit its investments in foreign
securities to the extent necessary to comply with these requirements.
If a Series owns shares in a foreign corporation that constitutes a "passive
foreign investment company" (a "PFIC") for federal income tax purposes and the
Series does not elect to treat the foreign corporation as a "qualified electing
fund" within the meaning of the Code, the Series may be subject to U.S. federal
income taxation on a portion of any "excess distribution" it receives from the
PFIC or any gain it derives from the disposition of such shares, even if such
income is distributed as a taxable dividend by the Series to its U.S.
shareholders. The Series may also be subject to additional interest charges in
respect of deferred taxes arising from such distributions or gains. Any federal
income tax paid by the Series as a result of its ownership on shares of a PFIC
will not give rise to a deduction or credit to the Series or to any shareholder.
A PFIC means any foreign corporation if, for the taxable year involved, either
(i) it derives at least 75 percent of its income from "passive income"
(including, but not limited to, interest, dividends, royalties, rents and
annuities), or (ii) on average, at least 50 percent of the value (or adjusted
basis, if elected) of the assets held by the corporation produce "passive
income".
On April 1, 1992, proposed U.S. Treasury regulations were issued regarding a
special mark to market election for regulated investment companies. Under these
regulations, the annual mark-to-market gain, if any, on shares held by the
Series in a PFIC would be treated as an excess distribution received by the
Series in the current year, eliminating the deferral and the related interest
charge. Such excess distribution amounts are treated as ordinary income, which
the Series will be required to distribute to shareholders even though the Series
has nor received any cash to satisfy this distribution requirement. These
regulations would be effective for taxable years ending after the promulgation
of the proposed regulations as final regulations.
THE FUND'S UNDERWRITER
Pursuant to an underwriting agreement in effect until January 31, 1997,
Distributors acts as principal underwriter in a continuous public offering for
shares of the Fund. The underwriting agreement will continue in effect for
successive annual periods provided that its continuance is specifically approved
at least annually by a vote of the Board, or by a vote of the holders of a
majority of the Fund's outstanding voting securities of each Series, and in
either event by a majority vote of the Fund's Directors who are not parties to
the underwriting agreement or interested persons of any such party (other than
as Directors of the Fund), cast in person at a meeting called for that purpose.
The underwriting agreement terminates automatically in the event of its
assignment and may be terminated by either party on 90 days' written notice.
Distributors pays the expenses of distribution of Fund shares, including
advertising expenses and the costs of printing sales material and prospectuses
used to offer shares to the public. The Fund pays the expenses of preparing and
printing amendments to its registration statements and prospectuses (other than
those necessitated by the activities of Distributors) and of sending
prospectuses to existing shareholders.
Until April 30, 1994, income dividends were reinvested at the offering price
(which includes the sales charge) and Distributors allowed 50% of the entire
commission to the securities dealer of record, if any, on an account. Starting
with any income dividends paid after April 30, 1994, such reinvestment is made
at net asset value.
During the fiscal years ended September 30, 1993, 1994 and 1995 the underwriting
commissions received by Distributors and the amounts retained, after allowances
to dealers, were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR - SEPTEMBER 30, 1993
COMMISSIONS COMMISSIONS
FUND RECEIVED RETAINED
- ---- -------- --------
<S> <C> <C>
Growth Series $ 3,960,004 $ 112,573
DynaTech Series 313,990 12,277
Utilities Series 48,570,562 1,885,048
Income Series 48,743,641 2,014,263
U.S. Government
Securities Series 79,919,762 6,885,309
FISCAL YEAR - SEPTEMBER 30, 1994
COMMISSIONS COMMISSIONS
FUND RECEIVED RETAINED
- ---- -------- --------
Growth Series $ 2,157,161 $ 213,992
DynaTech Series 172,942 4,415
Utilities Series 19,947,028 1,181,619
Income Series 53,164,210 1,717,009
U.S. Government
Securities Series 35,631,313 4,226,864
FISCAL YEAR - SEPTEMBER 30, 1995
COMMISSIONS COMMISSIONS
FUND RECEIVED RETAINED
- ---- -------- --------
Growth Series $ 2,112,855 $ 233,027
DynaTech Series 6,047,891 366,179
Utilities Series 231,256 25,733
Income Series 37,121,561 2,117,539
U.S. Government 10,902,931 656,562
Securities Series
Effective February 1, 1995, Distributors is entitled to retain net underwriting
discounts and commissions in connection with some redemptions or repurchases of
shares. For the fiscal year ended September 30, 1995, Distributors retained the
following amounts:
AMOUNT
FUND RETAINED
- ---- --------
<S> <C>
Growth Series $ 227
DynaTech Series 280
Utilities Series -0-
Income Series 4,700
U.S. Government 2,188
Securities Series
</TABLE>
Distributors may be entitled to reimbursement under the distribution plans of
the Funds as discussed below. Except as noted, Distributors received no other
compensation from the Fund for acting as underwriter.
PLANS OF DISTRIBUTION
The DynaTech Series and each class of the Growth Series, Utilities Series,
Income Series, and the U.S. Government Securities Series have adopted, separate
distribution plans pursuant to Rule 12b-1 under the 1940 Act ("Class I Plan(s)"
and "Class II Plan(s)", respectively, or "Plan(s)."
THE CLASS I PLANS
The Class I Plans, provide for the Series to pay up to a maximum of 0.25% with
respect to the Growth and DynaTech Series and 0.15% with respect to the Income,
Utilities, and U.S. Government Securities Series, per annum of their average
daily net assets for expenses incurred in the promotion and distribution of
their shares.
In implementing the Class I Plans, the Board has determined that initially, the
annual fees payable thereunder with respect to the Growth and DynaTech Series,
will be equal to the sum of: (i) the amount obtained by multiplying 0.25% by the
average daily net assets represented by Class I shares of the Series that were
acquired by investors on or after the May 1, 1994 ("New Assets") of such Series,
and (ii) the amount obtained by multiplying 0.15% by the average daily net
assets represented by Class I shares of the Series that were acquired before May
1, 1994 ("Old Assets") of such Series. Such fees will be paid to the current
securities dealer of record on the shareholder's account. In addition, until
such time as the maximum payment is reached on a yearly basis, up to an
additional 0.05% will be paid to Distributors under the Class I Plans for the
Growth and DynaTech Series. With respect to the Income and Utilities Series, the
annual fees payable thereunder will be equal to the sum of: (i) the amount
obtained by multiplying 0.15% by the average daily net assets represented by the
New Assets of such Series' Class I shares, and (ii) the amount obtained by
multiplying 0.10% by the average daily net assets represented by the Old Assets
of such Series' Class I shares. With respect to the U.S. Government Securities
Series, the annual fees payable thereunder will be equal to the sum of: (i) the
amount obtained by multiplying 0.15% by the New Assets of such Series' Class I
shares, and (ii) the amount obtained by multiplying 0.05% by the Old Assets of
such Series. Such fees will be paid to the current securities dealer of record
on the shareholder's account. In addition, until such time as the maximum
payment of 0.15% with respect to the Income, Utilities and U.S. Government
Securities Series is reached on a yearly basis, up to an additional 0.02% will
be paid to Distributors under their respective Class I Plan. The payments to be
made to Distributors will be used by Distributors to defray other marketing
expenses that have been incurred in accordance with the Class I Plans, such as
advertising.
The fee is a Series' Class I expense so that all Class I shareholders of a
Series, regardless of when they purchased their shares, will bear Rule 12b-1
expenses at the same rate. That rate initially will be at least 0.20% (0.15%
plus 0.05%) for the Growth and DynaTech Series; 0.12% (0.10% plus 0.02%) for the
Income and Utilities Series; and 0.07% (0.05% plus 0.02%) for the U.S.
Government Securities Series of such average daily net assets and, as each
Series' shares are sold on or after the Effective Date, will increase over time.
Thus, as the proportion of a Series' Class I shares purchased on or after the
Effective Date to outstanding Class I shares of a Series increases, the expenses
attributable to payments under the Class I Plan will also increase (but will not
exceed the maximum allowable under each Class I Plan). While this is the
currently anticipated calculation for fees payable under the Class I Plans, the
Class I Plans permit the Fund's Directors to allow the Growth and DynaTech
Series to pay a full 0.25% and the Income, Utilities, and U.S. Government
Securities Series to pay a full 0.15% on all assets both Old and New at any
time. The approval of the Fund's Board would be required to change the
calculation of the payments to be made under the Class I Plans.
Pursuant to the Class I Plans, Distributors or others will be entitled to be
reimbursed each quarter (up to the maximum as stated above) for actual expenses
incurred in the distribution and promotion of each Series' Class I shares,
including, but not limited to, the printing of prospectuses and reports used for
sales purposes, expenses of preparing and distributing sales literature and
related expenses, advertisements, and other distribution-related expenses,
including a prorated portion of Distributors' overhead expenses attributable to
the distribution of the Class I shares of each Series, as well as any
distribution or service fees paid to securities dealers or their firms or others
who have executed a servicing agreement with the Fund, Distributors or its
affiliates.
THE CLASS II PLANS
Under the Class II Plans, the Growth Series pays to Distributors or others
annual distribution fees, payable quarterly, of 0.75% of Class II's average
daily net assets, and the Utilities Series, Income Series, and U.S. Government
Securities Series pays to Distributors or others annual distribution fees,
payable quarterly of 0.50% of Class II's average daily net assets, in order to
compensate Distributors or others for providing distribution and related
services and bearing certain expenses of Class II of the respective series. All
expenses of distribution and marketing over that amount will be borne by
Distributors, or others who have incurred them, without reimbursement by the
Series. In addition to this amount, under the Class II Plans, the Growth Series
shall pay 0.25% per annum and the Utilities Series, Income Series and the U.S.
Government Securities Series shall pay 0.15%, payable quarterly, of the Class'
average daily net assets as a servicing fee. This fee will be used to pay
dealers or others for, among other things, assisting in establishing and
maintaining customer accounts and records; assisting with purchase and
redemption requests; receiving and answering correspondence; monitoring dividend
payments from the respective Series on behalf of customers, and similar
activities related to furnishing personal services and maintaining shareholder
accounts. Distributors may pay the securities dealer, from its own resources, a
commission of up to 1% of the amount invested at the time of investment.
IN GENERAL
In addition to the payments to which Distributors or others are entitled under
the Plans, the Plans also provide that to the extent a Series, the Manager or
Distributors or other parties on behalf of a Series, the Manager or
Distributors, make payments that are deemed to be payments for the financing of
any activity primarily intended to result in the sale of shares of each class of
a Series within the context of Rule 12b-1 under the 1940 Act, then such payments
shall be deemed to have been made pursuant to a Plan.
In no event shall the aggregate asset-based sales charges which include payments
made under a Plan, plus any other payments deemed to be made pursuant to a Plan,
exceed the amount permitted to be paid pursuant to the Rules of Fair Practice of
the National Association of Securities Dealers, Inc., Article III, Section
26(d)4.
The terms and provisions of the Plans relating to required reports, term, and
approval are consistent with Rule 12b-1. The Plans do not permit unreimbursed
expenses incurred in a particular year to be carried over to or reimbursed in
subsequent years.
To the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks will not be
entitled to participate in the Plans as a result of applicable federal law
prohibiting certain banks from engaging in the distribution of mutual fund
shares. Such banking institutions, however, are permitted to receive fees under
a Plan for administrative servicing or for agency transactions. If a bank were
prohibited from providing such services, its customers who are shareholders
would be permitted to remain shareholders of the Series, and alternate means for
continuing the servicing of such shareholders would be sought. In such an event,
changes in the services provided might occur and such shareholders might no
longer be able to avail themselves of any automatic investment or other services
then being provided by the bank. It is not expected that shareholders would
suffer any adverse financial consequences as a result of any of these changes.
Securities laws of states in which the Series' shares are offered for sale may
differ from the interpretations of federal law expressed herein, and banks and
financial institutions selling shares of the Fund may be required to register as
dealers pursuant to state law.
The Plans were approved in accordance with the provisions of Rule 12b-1. The
Plans are effective through January 31, 1997 and are renewable annually by a
vote of the Board, including a majority vote of the directors who are non-
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plan, cast in person at a meeting called for
that purpose. It is also required that the selection and nomination of such
directors be done by the non-interested directors. The Plans and any related
agreements may be terminated at any time, with- out any penalty, by vote of a
majority of the non-interested directors on not more than 60 days' written
notice, by Distributors on not more than 60 days' written notice, by any act
that constitutes an assignment of a Management Agreement with the Manager or, as
to each Series, by vote of a majority of the Series' outstanding shares.
Distributors or any dealer or other firm may also terminate their respective
distribution or service agreement at any time upon written notice.
With respect to a Plan, the Plan and any related agreements may not be amended
to increase materially the amount to be spent for distribution expenses without
approval by a majority of the the respective class of a Series' outstanding
shares, and all material amendments to the Plans or any related agreements shall
be approved by a vote of the non-interested directors, cast in person at a
meeting called for the purpose of voting on any such amendment.
Distributors is required to report in writing to the Board at least quarterly on
the amounts and purpose of any payment made under the Plans and any related
agreements, as well as to furnish the Board with such other information as may
reasonably be requested in order to enable the Board to make an informed
determination of whether the Plans should be continued.
<TABLE>
<CAPTION>
PAYMENTS UNDER 12B-1 PLANS
FISCAL YEAR ENDED SEPTEMBER 30, 1995
CLASS I ADVERTISING PRINTING PAYMENTS PAYMENTS TO TOTAL
/MAILING TO BROKERS OR
PROSPEC- UNDER- DEALERS
TUSES WRITERS DEALERS
<S> <C> <C> <C> <C> <C>
GROWTH SERIES $ 193,462 $ 89,706 $ 11,903 $ 852,339 $1,147,410
UTILITIES 283,241 197,804 38,723 2,635,919 3,155,607
SERIES
DYNATECH 14,298 21,602 1,452 99,426 136,778
SERIES
INCOME SERIES 551,791 269,755 216,120 5,591,439 6,629,104
U.S. 1,066,361 799,972 140,031 6,036,785 8,043,149
GOVERNMENT
SECURITIES
SERIES
CLASS II*
GROWTH SERIES -0- -0- -0- 64,467 64,467
UTILITIES -0- -0- -0- 127,293 127,293
SERIES
INCOME SERIES -0- -0- -0- 71,000 71,000
U.S. -0- -0- -0- 12,518 12,518
GOVERNMENT
SECURITIES
SERIES
*For the five month period ended September 30, 1995.
</TABLE>
GENERAL INFORMATION
PERFORMANCE
As noted in the Prospectus, each class of a Series may from time to time quote
various performance figures to illustrate the Series' past performance. It may
occasionally cite statistics to reflect its volatility or risk.
Performance quotations by investment companies are subject to rules adopted by
the SEC. These rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation furnished by
the Series be accompanied by certain standardized performance information
computed as required by the SEC. Current yield and average annual compounded
total return quotations used by the Series are based on the standardized methods
of computing performance mandated by the SEC. An explanation of those and other
methods used by the Fund to compute or express performance follows.
TOTAL RETURN
The average annual total return is determined by finding the average annual
compounded rates of return over one-, five- and ten-year periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable value.
The calculation assumes the maximum sales charge is deducted from the initial
$1,000 purchase order, and income dividends and capital gains are reinvested at
net asset value. The quotation assumes the account was completely redeemed at
the end of each one-, five- and ten-year period and the deduction of all
applicable charges and fees. If a change is made in the sales charge structure,
historical performance information will be restated to reflect the maximum sales
charge in effect currently.
In considering the quotations of total return by the Fund, investors should
remember that the maximum sales charge reflected in each quotation is a one time
fee (charged on all direct purchases) which will have its greatest impact during
the early stages of an investor's investment in a Series. The actual performance
of an investment will be affected less by this charge the longer an investor
retains the investment. The average annual compounded rate of return for Class I
shares of each Series for the indicated periods ended September 30, 1995 was as
follows:
<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR TEN-YEAR
CLASS I PERIOD PERIOD PERIOD
- ------- ------ ------ ------
<S> <C> <C> <C>
Growth Series 25.25% 14.26% 14.60%
DynaTech Series 26.21% 15.95% 13.08%
Utilities Series 18.91% 11.14% 10.96%
Income Series 9.09% 15.28% 12.02%
U.S. Government
Securities Series 8.72% 7.51% 8.50%
</TABLE>
These figures were calculated according to the SEC formula:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the one-, five- or ten-year periods at the end of the one-,
five- or ten-year periods (or fractional portion thereof).
As discussed in the Prospectus, a Series may quote total rates of return in
addition to its average annual total return. Such quotations are computed in the
same manner as a Series' average annual compounded rate, except that such
quotations will be based on each Series' actual return for a specified period
rather than its average return over one-, five- and ten-year periods.
The total rates of return for both classes (as applicable) for each Series for
the indicated periods ended on September 30, 1995 was as follows:
<TABLE>
<CAPTION>
ONE-YEAR FIVE-YEAR TEN-YEAR
CLASS I PERIOD PERIOD PERIOD
<S> <C> <C> <C>
Growth Series 25.25% 94.74% 290.76%
DynaTech Series 26.21% 109.56% 241.87%
Utilities Series 18.91% 69.58% 182.90%
Income Series 9.09% 103.58% 211.10%
U.S. Government 8.72% 43.64% 126.02%
Securities Series
<S> <C>
CLASS II FROM INCEPTION
Growth Series 12.58%
Utilities Series 10.89%
Income Series 7.47%
U.S. Government 4.20%
Securities Series
</TABLE>
YIELD
Current yield reflects the income per share earned by each Series' portfolio
investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period. The
yield figures for each Series for the 30-day period ended on September 30, 1995
were as follows:
<TABLE>
<CAPTION>
30-DAY
CLASS I YIELD
-----
<S> <C>
Growth Series 0.97%
DynaTech Series 0.79
Utilities Series 5.29%
Income Series 7.90%
U.S. Government Securities Series 6.55%
CLASS II
<S> <C>
Growth Series 0.25%
Utilities Series 4.97%
Income Series 7.66%
U.S. Government Securities Series 6.21%
</TABLE>
These figures were obtained using the following SEC formula:
6
Yield = 2 [( a-b + 1 ) - 1]
----
cd
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive income distributions
d = the maximum offering price per share on the last day of the period
CURRENT DISTRIBUTION RATE
Yield which is calculated according to a formula prescribed by the SEC is not
indicative of the amounts which were or will be paid to the Fund's shareholders.
Amounts paid to shareholders are reflected in the quoted "current distribution
rate." The current distribution rate is computed by dividing the total amount of
dividends per share paid by a Series during the past 12 months by a current
maximum offering price. Under certain circumstances, such as when there has been
a change in the amount of dividend payout or a fundamental change in investment
policies, it might be appropriate to annualize the dividends paid over the
period such policies were in effect, rather than using the dividends during the
past 12 months. The current distribution rate differs from the current yield
computation because it may include distributions to shareholders from sources
other than dividends and interest, such as premium income from option writing
and short-term capital gains, and is calculated over a different period of time.
The current distribution rate for each Series as September 30, 1995 were as
follows:
<TABLE>
<CAPTION>
CURRENT
DISTRIBUTION
CLASS I RATE
----
<S> <C>
Growth Series 0.67%
DynaTech Series 0.37%
Utilities Series 5.15%
Income Series 7.50%
U.S. Government Securities Series 6.86%
CLASS II
<S> <C>
Growth Series n/a
Utilities Series 4.91%
Income Series 7.24%
U.S. Government Securities Series 7.11%
VOLATILITY
</TABLE>
Occasionally statistics may be used to specify Fund volatility or risk. Measures
of volatility or risk are generally used to compare a Series' net asset value or
performance relative to a market index. One measure of volatility is beta. Beta
is the volatility of a fund relative to the total market as represented by the
Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates volatility
greater than the market, and a beta of less than 1.00 indicates volatility less
than the market. Another measure of volatility or risk is standard deviation.
Standard deviation is used to measure variability of net asset value or total
return around an average, over a specified period of time. The premise is that
greater volatility connotes greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS
With respect to those categories of investors who are permitted to purchase
shares of a Series of the Fund at net asset value, sales literature pertaining
to the Series may quote a current distribution rate, yield, total return,
average annual total return and other measures of performance, as described
elsewhere in this SAI, with the substitution of net asset value for the public
offering price.
Sales literature referring to the use of the Fund or any of its Series as a
potential investment for Individual Retirement Accounts (IRAs), Business
Retirement Plans, and other tax-advantaged retirement plans may quote a total
return based upon compounding of dividends on which it is presumed no federal
income tax applies.
Regardless of the method used, past performance is not necessarily indicative of
future results, but is an indication of the return to shareholders only for the
limited historical period used.
The Fund may include in its advertising or sales material information relating
to investment objectives and performance results of funds belonging to the
Templeton Group of Funds. Resources is the parent company of the advisers and
underwriter of both the Franklin Group of Funds and Templeton Group of Funds.
COMPARISONS
To help investors better evaluate how an investment in a Series of the Fund
might satisfy their investment objective, advertisements and other materials
regarding the Fund or any of its Series may discuss various measures of the
Series' performance as reported by various financial publications. Materials may
also compare performance (as calculated above) to performance as reported by
other investments, indices, and averages. Such comparisons may include, but are
not limited to, the following examples.
a) Dow Jones Composite Average or its component averages - an unmanaged index
composed of 30 blue-chip industrial corporation stocks (Dow Jones Industrial
Average), 15 utilities company stocks (Dow Jones Utilities Average), and 20
transportation company stocks. Comparisons of performance assume reinvestment of
dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks listed
on the Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of all
common equity securities for which daily pricing is available. Comparisons of
performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis and Lipper - Fixed Income Fund
Performance Analysis - measure total return and average current yield for the
mutual fund industry and rank individual mutual fund performance over specified
time periods, assuming reinvestment of all distributions, exclusive of any
applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of return
(average annual compounded growth rate) over specified time periods for the
mutual fund industry.
g) Mutual Fund Source Book, published by Morningstar, Inc. - analyzes price,
yield, risk, and total return for equity funds.
h) Financial publications: The Wall Street Journal, Business Week, Changing
Times, Financial World, Forbes, Fortune, and Money magazines - provide
performance statistics over specified time periods.
i) Consumer Price Index (or Cost of Living Index), published by the U.S. Bureau
of Labor Statistics - a statistical measure of change, over time, in the price
of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasury bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U.S.
Savings & Loan League Fact Book.
l) Historical data supplied by the research departments of First Boston
Corporation, the J.P. Morgan companies, Salomon Brothers, Merrill, Lynch,
Pierce, Fenner & Smith, Lehman Brothers and Bloomberg L.P.
In addition to the indices listed above, the following specific comparisons may
be appropriate:
Utilities Fund may be compared to Moody's Utilities Stock Index, an unmanaged
index of utility stock performance.
DynaTech Fund may be compared to:
a) Hambrecht & Quist Technology Index - an unmanaged index of technology-based
companies published by Hambrecht & Quist.
b) Pacific Stock Exchange Technology Index - an unmanaged index representing a
wide variety of technology-based companies ranging from established companies to
emerging growth companies.
c) Over-the-Counter (OTC) Composite Stock Index - an unmanaged index of stock
performance of all stocks listed in the OTC market.
Income Fund and U.S. Government Securities Fund may be compared to:
a) Salomon Brothers Broad Bond Index or its component indices - The Broad Index
measures yield, price, and total return for Treasury, Agency, Corporate, and
Mortgage bonds.
b) Lehman Brothers Aggregate Bond Index or its component indices - The Aggregate
Bond Index measures yield, price and total return for Treasury, Agency,
Corporate, Mortgage, and Yankee bonds.
c) Standard & Poor's Bond Indices - measures yield and price of Corporate,
Municipal, and Government bonds.
d) Other taxable investments including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds, and repurchase agreements.
In assessing such comparisons of performance, an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to the portfolio of any Series of the Fund, that the averages are
generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by any Series to calculate its
figures. In addition there can be no assurance that any Series of the Fund will
continue this performance as compared to such other averages.
From time to time, Fund advertisements or information may include a discussion
of certain attributes or benefits to be derived by an investment in any of the
Fund's Series. Such advertisements or information may include symbols,
headlines, or other material which highlight or summarize the information
discussed in more detail in the communication. For example:
1. Franklin pioneered the concept of Ginnie Mae funds, and the U.S. Government
Securities Series, with over $11 billion in assets and more than 500,000
shareholders at the end of its fiscal year, is one of the largest Ginnie Mae
funds in the U.S. and the world. Shareholders in this Series, which has a
history of solid performance, range from individual investors with a few
thousand dollars to institutions that have invested millions of dollars.
The U.S. Government Securities Series offers investors the opportunity to invest
in GNMAs, which are among the highest yielding U.S. government securities on the
market.
2. Advertisements or information about the U.S. Government Securities Series may
compare the Series' performance to the return on certificates of deposit or
other investments. Investors should be aware, however, that an investment in the
U.S. Government Securities Series involves the risk of fluctuation of principal
value, a risk generally not present in an investment in a certificate of deposit
issued by a bank. For example, as the general level of interest rates rise, the
value of the U.S. Government Series' fixed-income investments, as well as the
value of its shares which are based upon the value of such portfolio
investments, can be expected to decrease. Conversely, when interest rates
decrease, the value of the Series' shares can be expected to increase.
Certificates of deposit are frequently insured by an agency of the U.S.
government. An investment in the Series is not insured by any federal, state or
private entity.
3. Over the life of the Utilities Series, dividends have increased in 28 of the
last 46 years. Historically, equity securities of utility companies have paid a
higher level of dividends than that paid by the general stock market. The
Utilities Series, well established for over 40 years, is the oldest mutual fund
in the U.S. investing in securities issued by public utility companies,
primarily in the country's fast growing regions, and the Series has been
continuously managed by the same portfolio manager since 1957.
4. The Franklin Income Series has paid uninterrupted dividends for the past
46 years.
5. The Franklin Growth Series offers investors a convenient way to invest in a
diversified portfolio of America's established growth companies, companies that
are leaders in their industries.
6. The Franklin Growth Series made the 1990 and 1991 Forbes Mutual Fund Honor
Roll for its performance in both up and down markets.
OTHER FEATURES AND BENEFITS
The Series of the Fund may be used in various ways by investors to achieve their
investment goals. The following list reflects some of the ways in which the
Series of the Fund may be used to achieve investment objectives or to illustrate
other benefits:
DOLLAR COST AVERAGING - The Series of the Fund can be used in programs involving
dollar cost averaging to help investors reduce the per share costs of their
investments over time.
RETIREMENT PLANNING - The Series of the Fund can be used to help an investor
build a retirement plan. The Franklin Retirement Planning Guide leads an
investor through the steps to start a retirement savings program. Of course, an
investment in the Fund cannot guarantee that such goals will be met.
COLLEGE COSTS - The Series of the Fund can be used to help an investor save for
educational costs. The Franklin College Costs Planner may assist an investor in
determining how much money must be invested on a monthly basis in order to have
a projected amount available in the future to fund a child's college education.
(Projected college cost estimates are published by the College Board.) Of
course, an investment in the Fund cannot guarantee that such goals will be met.
PRICE STABILITY - The example below can be used to illustrate the stability of
the Income Series' net asset value, when compared to the Dow Jones industrial
average, during periods of market volatility:
DOW JONES FUND'S NET
DATE AVERAGE ASSET VALUE
10/16/87 2246.73 $2.19
10/19/87 1738.41 $2.12
Change -508.32 -.07
04/13/88 2107.09 $2.17
04/14/88 2005.63 $2.16
------- -----
Change -101.46 -.01
Each Series may also be discussed in shareholder newsletters; with the Franklin
Automatic Investment Plan; in articles discussing tax planning; in discussions
about using Franklin Gift Certificates to purchase shares of a Series; to
demonstrate the benefits offered by professional management.
In advertising ratings or rankings of the Franklin Group of Funds(R) operations,
the Funds may advertise, together or separately, the following past rating, and
such information in that category that may appear in the future:
The Series of the Fund are members of the Franklin Templeton Group, one of the
largest mutual fund organizations in the United States and may be considered in
a program for diversification of assets. Founded in 1947, Franklin, one of the
oldest mutual fund organizations, has managed mutual funds for over 48 years. In
1992, Franklin, a leader in managing fixed-income mutual funds and an innovator
in creating domestic equity funds, joined forces with Templeton Worldwide, Inc.,
a pioneer in international investing. Together, the Franklin Templeton Group has
over $130 billion in assets under management for more than 3.9 million
shareholder accounts and offers 114 U.S.-based mutual funds. The Fund may
identify itself by its NASDAQ or CUSIP number.
Franklin has been ranked number one in service quality in the Dalbar Surveys,
Inc. broker/dealer survey for five of the past seven years. One other fund group
was also ranked number one in 1993.
OWNERSHIP AND AUTHORITY DISPUTES
In the event of disputes involving multiple claims of ownership or authority to
control a shareholder's account, the Fund has the right (but has no obligation)
to (a) freeze the account and require the written agreement of all persons
deemed by the Fund to have a potential property interest in the account, prior
to executing instructions regarding the account; (b) interplead disputed funds
or accounts with a court of competent jurisdiction; or (c) surrender ownership
of all or a portion of the account to the Internal Revenue Service in response
to a Notice of Levy.
ADDITIONAL INFORMATION FOR
INSTITUTIONAL INVESTORS
As the investments permitted to the U.S. Government Securities Series are
limited to securities issued or guaranteed by the U.S. government or its
agencies and instrumentalities, the shares of the U.S. Government Securities
Series are generally eligible for investment by federally-chartered credit
unions, federally-chartered savings and loan associations, national banks and
the National Marine Fisheries Service Capital Construction Fund. While the
Series is not aware of any investments permitted to it which would destroy such
eligibility, it has agreed for the benefit of such federally-chartered
institutions to refrain from such investments should the situation arise. The
U.S. Government Securities Series may be a permissible investment for certain
state-chartered institutions as well.
ALL INSTITUTIONAL INVESTORS SHOULD CONSULT THEIR OWN LEGAL ADVISORS TO
DETERMINE WHETHER AND TO WHAT EXTENT THE SHARES OF THE FUND CONSTITUTE LEGAL
INVESTMENTS FOR THEM.
FINANCIAL STATEMENTS
The audited financial statements contained in the Annual Report to Shareholders
of the Fund dated September 30, 1995, including the auditors's report, are
incorporated herein by reference.
FRANKLIN CUSTODIAN FUNDS, INC.
File Nos. 2-11346
811-537
FORM N-1A
PART C
Other Information
Item 24 Financial Statements and Exhibits
a) Financial Statements incorporated herein by reference to the
Registrant's Annual Report to Shareholders dated September 30, 1995 as
filed with the SEC electronically on form type N-30D on November 29,
1995.
(i) Report of Independent Auditors - November 3, 1995.
(ii) Statement of Investments in Securities and Net Assets - September
30, 1995.
(iii) Statements of Assets and Liabilities - September 30, 1995.
(iv) Statements of Operations - for the year ended September 30, 1995.
(v) Statements of Changes in Net Assets - for the years ended
September 30, 1995 and 1994.
(vi) Notes to Financial Statements
b) Exhibits:
The following exhibits, are incorporated by reference, except exhibits
(1)(vii), (6)(i), 10(i), (11)(i), (15)(vi), (15)(vii), 18(i), 27(i),
27(ii), 27(iii), 27(iv), 27(v), 27(vi), 27(vii), 27(viii), and 27(ix)
which are attached herewith as noted.
(1) copies of the charter as now in effect;
(i) Articles of Incorporation dated October 9, 1979
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Agreement and Articles of Merger dated November 7, 1979
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii)Certificate of Amendment to Articles of Incorporation dated
October 4, 1985
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv)Articles of Amendment dated October 14, 1985
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Certificate of Amendment to Articles of Incorporation dated
February 24, 1989
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi)Certificate of Amendment to Articles of Incorporation dated March
21, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vii)Articles Supplementary to the Charter dated June 29, 1995
(2) copies of the existing By-Laws or instruments corresponding thereto;
(i) By-Laws
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(3) copies of any voting trust agreement with respect to more than five
percent of any class of equity securities of the Registrant;
Not Applicable
(4) specimens or copies of each security issued by the Registrant,
including copies of all constituent instruments, defining the rights
of the holders of such securities, and copies of each security being
registered;
Not Applicable
(5) copies of all investment advisory contracts relating to the management
of the assets of the Registrant;
(i) Management Agreement between the Registrant on behalf of the
DynaTech Series and Franklin Advisers, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Management Agreement between the Registrant on behalf of the
Growth Series and Franklin Advisers, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii)Management Agreement between the Registrant on behalf of the
Income Series and Franklin Advisers, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Management Agreement between the Registrant on behalf of the U.S.
Government Securities Series and Franklin Advisers, Inc. dated
May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Management Agreement between the Registrant on behalf of the
Utilities Series and Franklin Advisers, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(6) copies of each underwriting or distribution contract between the
Registrant and a principal underwriter, and specimens or copies of
all agreements between principal underwriters and dealers;
(i) Amended and Restated Distribution Agreement between Registrant and
Franklin/Templeton Distributors, Inc. dated March 29, 1995
(ii) Form of Dealer Agreements between Franklin/Templeton Distributors,
Inc. and dealers
Registrant: Franklin Federal Tax-Free Income Fund
Filing: Post-Effective Amendment No. 17 to Registration
Statement on Form N-1A
File No. 2-75925
Filing Date: March 27, 1995
(7) copies of all bonus, profit sharing, pension or other similar contracts
or arrangements wholly or partly for the benefit of directors or
officers of the Registrant in their capacity as such; any such plan
that is not set forth in a formal document, furnish a reasonably
detailed description thereof;
Not Applicable
(8) copies of all custodian agreements and depository contracts under
Section 17(f) of the 1940 Act, with respect to securities and similar
investments of the Registrant, including the schedule of remuneration;
(i) Custody Agreement between Registrant and Bank of America NT & SA
dated September 17, 1991
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Amendment to Custodian Agreement between Registrant and Bank of
America dated April 12, 1995
Registrant: Franklin Gold Fund
Filing: Post-Effective Amendment No. 44 to Registration on Form
N-1A
File No.2-30761
Filing Date: September 28, 1995
(9) copies of all other material contracts not made in the ordinary course
of business which are to be performed in whole or in part at or after
the date of filing the Registration Statement;
Not Applicable
(10) an opinion and consent of counsel as to the legality of the securities
being registered, indicating whether they will when sold be legally
issued, fully paid and nonassessable;
(i) Opinion and consent of counsel dated November 21, 1995
(11) copies of any other opinions, appraisals or rulings and consents to the
use thereof relied on in the preparation of this Registration
Statement and required by Section 7 of the 1933 Act;
(i) Consent of Independent Auditors dated November 28, 1995
(12) all financial statements omitted from Item 23;
Not Applicable
(13) copies of any agreements or understandings made in consideration for
providing the initial capital between or among the Registrant, the
underwriter, adviser, promoter or initial stockholders and written
assurances from promoters or initial stockholders that their
purchases were made for investment purposes without any present
intention of redeeming or reselling;
(i) Letter of Understanding dated April 12, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(14) copies of the model plan used in the establishment of any retirement
plan in conjunction with which Registrant offers its securities, any
instructions thereto and any other documents making up the model
plan. Such form(s) should disclose the costs and fees charged in
connection therewith;
(i) Copy of model retirement plan
Registrant: AGE High Income Fund, Inc.
Filing: Post-Effective Amendment No. 26 to Registration
Statement on Form N-1A
File No. 2-30203
Filing Date: August 1, 1989
(15) copies of any plan entered into by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes all material aspects of the
financing of distribution of Registrant's shares, and any agreements
with any person relating to implementation of such plan.
(i) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of the DynaTech Series and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of the Growth Series and Franklin/Templeton Distributors,
Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iii)Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of the Income Series and Franklin/Templeton Distributors,
Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(iv) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of the U.S. Government Securities Series and
Franklin/Templeton Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(v) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of the Utilities Series and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(vi) Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of the Utilities Series, Income Series and U.S. Government
Securities Series - Class II and Franklin/Templeton Distributors,
Inc. dated March 30, 1995
(vii)Distribution Plan pursuant to Rule 12b-1 between the Registrant on
behalf of the Growth Series - Class II and Franklin/Templeton
Distributors, Inc. dated March 30, 1995
(16) schedule for computation of each performance quotation provided in the
Registration Statement in response to Item 22 (which need not be
audited).
(i) Schedule for Computation of Performance Quotation
Registrant: Franklin Tax-Advantaged U.S. Government Securities
Fund
Filing: Post-Effective Amendment No. 8 to Registration
Statement on Form N-1A
File No. 33-11963
Filing Date: March 1, 1995
(17) Power of Attorney
(i) Powers of Attorney dated February 16, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(ii) Certificate of Secretary dated February 16, 1995
Filing: Post-Effective Amendment No. 71 to
Registration Statement on Form N-1A
File No. 2-11346
Filing Date: April 27, 1995
(18) Copies of any plan entered into by Registrant pursuant to Rule
18f-3 under the 1940 Act.
(i) Form of Multiple Class Plan
(27) Financial Data Schedule Computation
(i) Financial Data Schedule for DynaTech Series
(ii) Financial Data Schedule for Growth Series - Class I
(iii)Financial Data Schedule for Growth Series - Class II
(iv) Financial Data Schedule for Utilities Series - Class I
(v) Financial Data Schedule for Utilities Series - Class II
(vi) Financial Data Schedule for U.S. Government Securities
Series - Class I
(vii)Financial Data Schedule for U.S. Government Securities
Series - Class II
(viii)Financial Data Schedule for Income Series - Class I
(ix) Financial Data Schedule for Income Series - Class II
Item 25 Persons Controlled by or Under Common Control with Registrant
None
Item 26 Number of Holders of Securities
As of September 30, 1995, the number of record holders of each series of the
Registrant was as follows:
Number of
Record Holders
Class I Class II
Growth Series 80,677 628
Utilities Series 215,357 720
DynaTech Series 12,137 n/a
Income Series 308,978 3,204
U.S. Government Securities Series 474,893 578
Item 27 Indemnification
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in
connection with securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court or appropriate jurisdiction
the question whether such indemnification is against public policy as
expressed in the Act and will be governed by the final adjudication of
such issue.
Item 28 Business and Other Connections of Investment Adviser
a) Franklin Advisers, Inc.
The officers and directors of the Registrant's investment adviser also serve
as officers and/or directors for (1) the adviser's corporate parent, Franklin
Resources, Inc., and/or (2) other investment companies in the Franklin Group
of Funds. In addition, Mr. Charles B. Johnson is a director of General Host
Corporation. For additional information please see Part B and Schedules A and
D of Form ADV of the Funds' Investment Manager (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and directors
of the Investment Manager and information as to any business, profession,
vocation or employment of a substantial nature engaged in by those officers
and directors during the past two years.
Item 29 Principal Underwriters
a) Franklin/Templeton Distributors, Inc. ("Distributors") also acts as
principal underwriter of shares of AGE High Income Fund, Inc., Franklin
Tax-Exempt Money Fund, Franklin Equity Fund, Franklin Gold Fund,
Franklin Municipal Securities Trust, Franklin California Tax-Free
Income Fund, Inc., Franklin New York Tax-Free Income Fund, Inc.,
Franklin California Tax-Free Trust, Franklin Investors Securities
Trust, Franklin Premier Return Fund, Franklin Tax-Free Trust, Franklin
New York Tax-Free Trust, Franklin Strategic Mortgage Portfolio,
Franklin Strategic Series, Franklin International Trust, Franklin
Tax-Advantaged International Bond Fund, Franklin Tax-Advantaged U.S.
Government Securities Fund, Franklin Tax-Advantaged High Yield
Securities Fund, Franklin Managed Trust, Franklin Value Investors
Trust, Franklin Federal Tax-Free Income Fund, Institutional Fiduciary
Trust, Franklin Money Fund, Franklin Federal Money Fund, Franklin Real
Estate Securities Trust, Franklin Templeton Global Trust, Franklin
Templeton Money Fund Trust, Templeton Variable Products Series Fund,
Templeton Real Estate Securities Fund, Templeton Growth Fund, Inc.,
Templeton Funds, Inc., Templeton Smaller Companies Growth Fund, Inc.,
Templeton Income Trust, Templeton Global Opportunities Trust, Templeton
Institutional Funds, Inc., Templeton American Trust, Inc., Templeton
Capital Accumulator Fund, Inc., Templeton Developing Markets Trust,
Templeton Global Investment Trust, Templeton Variable Annuity Fund, and
Franklin Templeton Japan Fund.
b) The information required by this item 29 with respect to each
director and officer of Distributors is incorporated by reference to
Part B of this N-1A and Schedule A of Form BD filed by Distributors
with the Securities and Exchange Commission pursuant to the Securities
Act of 1934 (SEC File No. 8-5889)
c) Not applicable. Registrant's principal underwriter is an
affiliated person of an affiliated person of the Registrant.
Item 30 Location of Accounts and Records
The accounts, books or other documents required to be maintained by Section
31 (a) of the Investment Company Act of 1940 are kept by the Fund or its
shareholder services agent, Franklin/Templeton Investor Services, Inc., both
of whose address is 777 Mariners Island Blvd., San Mateo, California 94404.
Item 31 Management Services
There are no management-related service contracts not discussed in Part A or
Part B.
Item 32 Undertakings
a) The Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of
any director or directors when requested in writing to do so by the
record holders of not less than 10 percent of the Registrant's
outstanding shares to assist its shareholders in accordance with the
requirements of Section 16(c) of the Investment Company Act of 1940.
b) The Registrant hereby undertakes to comply with the information
requirement in Item 5A of the Form N-1A by including the required
information in the Fund's Annual Report to Shareholders and to furnish
each person to whom a prospectus is delivered a copy of the Annual
Report upon request and without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Amendment to its
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of San Mateo and the State of
California, on the 29th day of November 1995.
FRANKLIN CUSTODIAN FUNDS, INC.
(Registrant)
By: Charles B. Johnson*
Charles B. Johnson
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities
and on the dates indicated:
Charles B. Johnson* Principal Executive
Charles B. Johnson Officer and Director
Dated: November 29, 1995
Martin L. Flanagan* Principal Financial Officer
Martin L. Flanagan Dated: November 29, 1995
Diomedes Loo-Tam* Principal Accounting Officer
Diomedes Loo-Tam Dated: November 29, 1995
Harris J. Ashton* Director
Harris J. Ashton Dated: November 29, 1995
S. Joseph Fortunato* Director
S. Joseph Fortunato Dated: November 29, 1995
Rupert H. Johnson, Jr.* Director
Rupert H. Johnson, Jr. Dated: November 29, 1995
Gordon S. Macklin* Director
Gordon S. Macklin Dated: November 29, 1995
*By /s/ Larry L. Greene
Larry L. Greene, Attorney-in-Fact
(Pursuant to Powers of Attorney previously filed)
FRANKLIN CUSTODIAN FUNDS, INC.
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO. DESCRIPTION PAGE NO. IN
SEQUENTIAL
NUMBERING SYSTEM
EX-99.B1(i) Articles of Incorporation dated October 9, 1979 *
EX-99.B1(ii) Agreement and Articles of Merger dated *
November 7, 1979
EX-99.B1(iii) Certificate of Amendment to Articles of *
Incorporation dated October 4, 1985
EX-99.B1(iv) Articles of Amendment dated October 14, 1985 *
EX-99.B1(v) Certificate of Amendment to Articles of *
Incorporation dated February 24, 1989
EX-99.B1(vi) Certificate of Amendment to Articles of *
Incorporation dated March 21, 1995
EX-99.B1(vii) Articles Supplementary to the Charter dated Attached
June 29, 1995
EX-99.B2(i) By-Laws *
EX-99.B5(i) Management Agreement between the Registrant on *
behalf of the DynaTech Series and Franklin
Advisers, Inc. dated May 1, 1994
EX-99.B5(ii) Management Agreement between the Registrant on *
behalf of the Growth Series and Franklin
Advisers, Inc. dated May 1, 1994
EX-99.B5(iii) Management Agreement between the Registrant on *
behalf of the Income Series and Franklin
Advisers, Inc. dated May 1, 1994
EX-99.B5(iv) Management Agreement between the Registrant on *
behalf of the U.S. Government Securities
Series and Franklin Advisers, Inc. dated May
1, 1994
EX-99.B5(v) Management Agreement between the Registrant on *
behalf of the Utilities Series and Franklin
Advisers, Inc. dated May 1, 1994
EX-99.B6(i) Amended and Restated Distribution Agreement Attached
between Registrant and Franklin/Templeton
Distributors, Inc. dated March 29, 1995
EX-99.B6(ii) Form of Dealer Agreement between *
Franklin/Templeton Distributors, Inc. and
dealers
EX-99.B8(i) Custody Agreement between Registrant and Bank *
of America NT & SA dated September 17, 1991
EX-99.B8(ii) Amendment to Custodian Agreement between *
Registrant and Bank of America dated December
1, 1994
EX-99.B10(i) Opinion and Consent of Counsel dated November Attached
21, 1995
EX-99.B11(i) Consent of Independent Auditors dated November Attached
28, 1995
EX-99.B13(i) Letter of Understanding *
EX-99.B14(i) Copy of Model Retirement Plan *
EX-99.B15(i) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of the
DynaTech Series and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
EX-99.B15(ii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of the Growth
Series and Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.B15(iii) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of the Income
Series and Franklin/Templeton Distributors,
Inc. dated May 1, 1994
EX-99.B15(iv) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of the U.S.
Government Securities Series and
Franklin/Templeton Distributors, Inc. dated
May 1, 1994
EX-99.B15(v) Distribution Plan pursuant to Rule 12b-1 *
between the Registrant on behalf of the
Utilities Series and Franklin/Templeton
Distributors, Inc. dated May 1, 1994
EX-99.B15(vi) Form of Distribution Plan pursuant to Rule Attached
12b-1 between the Registrant on behalf of the
Utilities Series, Income Series and U.S.
Government Securities Series - Class II and
Franklin/Templeton Distributors, Inc., dated
March 30, 1995
EX-99.B15(vii) Distribution Plan pursuant to Rule 12b-1 Attached
between the Registrant on behalf of the Growth
Series - Class II and Franklin/Templeton
Distributors, Inc., dated March 30, 1995
EX-99.B16(i) Schedule for Computation of Performance *
Quotation
EX-99.B17(i) Powers of Attorney dated February 16, 1995 *
EX-99.B17(ii) Certificate of Secretary dated February 16, *
1995
EX-99.B18(i) Form of Multiple Class Plan Attached
EX-27.B(i) Financial Data Schedule for Dynatech Series Attached
EX-27.B(ii) Financial Data Schedule for Franklin Growth Attached
Series - Class I
EX-27.B(iii) Financial Data Schedule for Franklin Growth Attached
Series - Class II
EX-27.B(iv) Financial Data Schedule for Franklin Utilities Attached
Series - Class I
EX-27.B(v) Financial Data Schedule for Franklin Utilities Attached
Series - Class II
EX-27.B(vi) Financial Data Schedule for U.S. Government Attached
Securities Series - Class I
EX-27.B(vii) Financial Data Schedule for U.S. Government Attached
Securities Series - Class II
EX-27.B(viii) Financial Data Schedule for Franklin Income Attached
Series - Class I
EX-27.B(ix) Financial Data Schedule for Franklin Income Attached
Series - Class II
* Incorporated by reference
FRANKLIN CUSTODIAN FUNDS. INC.
ARTICLES SUPPLEMENTARY TO THE CHARTER
FRANKLIN CUSTODIAN FUNDS, INC., a Maryland corporation having its
principal office c/o Corporation Trust Incorporated, 32 South Street, Baltimore,
Maryland 21202 (hereinafter called the "Corporation"), and registered under the
Investment Company Act of 1940 as an open-end company, hereby certifies in
accordance with the requirements of Sections 2-208, 2.201.1 of the Maryland
General Corporation Law to the State Department of Assessments and Taxation of
Maryland, that:
FIRST: The Corporation has authority to issue a total of
ten billion (10,000,000,000) shares of stock with a par value of
one cent ($. 01) per share, such shares having an aggregate par
value of $100,000,000. The allocation of such shares to the
Corporation's existing classes and sub-classes is as follows:
Class Designation Number of Shares Allocated
U.S. Government Securities Series Class I 2,500,000,000
U.S. Government Securities Series Class II 2,500,000,000
Income Series Class I 2,600,000,000
Income Series Class II 600,000,000
Growth Series Class I 250,000,000
Growth Series Class II 250,000,000
DynaTech Series Class I 250,000,000
DynaTech Series Class II 250,000,000
Utilities Series Class I 400,000,000
Utilities Series Class II 400,000,000
SECOND: The Board of Directors of the Corporation, in accordance with
Section 2-105(c) of the Maryland General Corporation Law, has adopted a
resolution increasing the aggregate number of shares by four billion
(4,000,000,000) shares so that the Corporation has authority to issue fourteen
billion (14,000,000,000) shares.
THIRD: The Board of Directors has allocated one billion (1,000,000,000) of
such increased shares to the Income Series Class I and three billion
(3,000,000,000) of such increased shares to the Income Series Class II.
FOURTH: Following the aforesaid actions, the total number of shares that
the Corporation is authorized to issue is fourteen billion (14,000,000,000) with
a par value of one cent ($.Ol) per share and an aggregate par value of
$140,000,000 and the allocation of shares to the Corporation's existing classes
and sub-classes is as follows:
Class Designation Number of Shares Allocated
U.S. Government Securities Series Class I 2,500,000,000
U.S. Government Securities Series Class II 2,500,000,000
Income Series Class I 3,600,000,000
Income Series Class II 3,600,000,000
Growth Series Class I 250,000,000
Growth Series Class II 250,000,000
DynaTech Series Class I 250,000,000
DynaTech Series Class II 25O,000,000
Utilities Series Class I 400,000,000
Utilities Series Class II 400,000,000
FIFTH: A description of the shares so classified, with the preferences,
conversions and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption as set or
changed by the Board of Directors of the Corporation is as follows:
(a)The assets of the Corporation received as a consideration for the issue
or sale of shares of each class of stock, together with all income, earnings,
profits and proceeds thereof, in whatsoever form the same may be, may be
invested only in cash or securities having at the time of investments the
qualifications expressed in relation to each class. As used herein "Cash" shall
include cash equivalents as determined by the Board of Directors and
"Securities" shall include all forms of stocks, bonds, rights and certificates
or evidences of interest indebtedness and participation irrespective of form.
The investment qualifications for the classes of stock so classified shall be as
follows:
(1) GROWTH SERIES SHARES.
(A) Cash; or
(B) Any shares of common or capital stock
listed or admitted to trading privileges or dealt in on the New York Stock
Exchange or any other recognized security exchange or the issuer of which is a
corporation, association or similar legal entity having gross assets valued by
it at not less than $1,000,000, as shown by its latest published annual report
and bonds or preferred stock or other Securities convertible into such common or
capital stock or in covered call options listed for trading on a national
securities exchange.
(2) U.S. GOVERNMENT SECURITIES SERIES.
(A) Cash; or
(B) Securities which are obligations of or
guaranteed by the United States Government or its instrumentalities.
(3) INCOME SERIES SHARES.
(A) Cash; or
(B) Securities listed or admitted to trading
privileges or dealt in on the New York Stock Exchange or any other recognized
security exchange; or the issuer of corporation, association or similar legal
entity having gross assets valued by it at not less than $1,000,000, as shown by
its latest published annual report.
(4) UTILITIES SERIES SHARES.
(A) Cash; or
(B) Securities issued, created or guaranteed
by a corporation, association or similar legal entity engaged in the public
utilities industry. The determination of the Board of Directors shall be
conclusive as to what corporations are engaged in the public utilities industry.
(5) DYNATECH SERIES SHARES.
(A) Cash; or
(B) Securities listed or admitted to trading
privileges or dealt in on the New York Stock Exchange or any other recognized
security exchange or the issuer of which is a corporation, association or
similar legal entity having gross assets valued by it at not less than
$1,000,000, as shown by its latest published annual report.
(b) The shares of Class I and Class II of each Series shall represent
proportionate interests in the same portfolio of investments of the Series. The
shares of Class I and Class II of each Series shall have the same rights and
privileges, and shall be subject to the same limitations and priorities, all as
set forth herein, provided that dividends paid on the shares of Class I shall
not reflect any reduction for payment of fees under the Distribution Plan of
Class II adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940
as amended, and dividends paid on the shares of Class II shall not reflect
reduction for payment of fees under the Distribution Plan of Class I adopted
pursuant to Rule 12b-1 under the Investment Company Act of 1940 as amended, and
provided further, that the shares of Class I shall not vote upon or with respect
to any matter relating to or arising from any such Distribution Plan of Class
II, and the shares of Class II shall not vote upon or with respect to any matter
relating to or arising from any such Distribution Plan of Class I.
Each share of a class shall have equal rights with each other share
of that class with respect to the assets of the Corporation pertaining to that
class. The dividends payable to the holders of any class or sub-class thereof
(subject to any applicable rules, regulation or order of the Securities and
Exchange Commission or any other applicable law or regulation) may be charged
with any pro rata portion of distribution expenses paid pursuant to a Plan of
Distribution adopted by such class or sub-class thereof in accordance with
Investment Company Act of 1940 Rule 12b-1 (or any successor thereto), which
dividend shall be determined as directed by the Board and need not be
individually declared, but may be declared and paid in accordance with a formula
adopted by the Board. Except as otherwise provided herein, all references in
these Articles of Incorporation to stock or class of stock shall apply without
discrimination to the shares of each class of stock.
(c) The assets of the Corporation received as a consideration for the
issue or sale of shares of each class of its stock, together with all income,
earnings, profits and proceeds thereof from the time of receipt thereof by the
Corporation in whatever form the same shall from time to time be, shall
irrevocably appertain to such class of stock and shall constitute the assets of
such class of stock, subject only to the rights of creditors, and shall be so
entered and segregated upon the books of account, and shall be known as the
"underlying assets" of such class. The underlying assets of each class shall be
charged with the liabilities (including accrued expenses and reserves as
determined from time to time by the Board of Directors in accordance with sound
accounting practice) in respect of such class and shall also be charged with the
share of such liabilities (including general liabilities of the Corporation) in
respect of any two or more classes in proportion to the liquidating asset value
of the respective classes, determined as hereinafter provided. The determination
of the Board of Directors shall be conclusive as to which such liabilities are
allocable to a given class and as to which of the same are general or allocable
to two or more classes. If at any time any reasonable doubt may exist as to the
class or classes of stock to which any particular assets of the Corporation
shall properly belong, the Board of Directors may, by specific resolution,
resolve such doubt and its action in that regard shall be conclusive.
(d) In the event of the dissolution or other liquidation of the
Corporation the registered holders of the stock of any class shall be entitled
to receive, as a class, the underlying assets of such class available for
distribution to stockholders less the liabilities (including accrued expenses
and reserves as determined from time to time by the Board of Directors in
accordance with sound accounting practice) in respect of such class, and also
the share of such liabilities (including general liabilities of the Corporation)
in respect of any two or more classes in proportion to the liquidating, asset
value of the respective classes. Said available underlying assets of any class,
less the liabilities of such class shall be distributable among the shareholders
of the stock of such class in proportion to the number of shares of stock of
such class held by them respectively.
(e) The holder of each share of stock of the Corporation shall be
entitled to one vote for each full share, and a fractional vote for each
fractional share of stock, irrespective of the class then standing in his or her
name in the books of the Corporation. On any matter submitted to a vote of
shareholders, all shares of the Corporation then issued and outstanding and
entitled to vote, irrespective of the class or sub-class, shall be voted in the
aggregate and not by class or sub-class except (1) when otherwise expressly
provided by the Maryland General Corporation Law, or (2) when required by the
Investment Company Act of 1940, as amended, shares shall be voted by individual
classes, or sub-classes and (3) when the matter does not affect any interest of
the particular class or sub-class, then only shareholders of the affected
classes or sub-classes shall be entitled to vote thereon. Holders of shares of
stock of the Corporation shall not be entitled to cumulative voting in the
election of directors or on any other matter.
SIXTH: The Growth Series Shares, the U.S. Government Securities Series
Shares, the Income Series Shares, the Utilities Series Shares, and the DynaTech
Series Shares have been duly classified by the board of directors pursuant to
authority and power contained in the charter of the Corporation.
IN WITNESS WHEREOF, FRANKLIN CUSTODIAN FUNDS, INC. has caused
these presents to be signed in its name and on its behalf by its
President and witnessed by its Secretary on June 29, 1995.
FRANKLIN CUSTODIAN FUNDS, INC.
By: /s/ Charles B. Johnson
Charles B Johnson
President
Witness (Attest)
/s/ Brian E. Lorenz
Brian E. Lorenz, Secretary
THE UNDERSIGNED, President of FRANKLIN CUSTODIAN FUNDS, INC. who
executed on behalf of said corporation the foregoing Articles Supplementary to
the Charter, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said corporation, the foregoing Supplementary to the
Charter to be the corporate act of said corporation and further certifies that,
to the best of his knowledge, information and belief, the matters and facts set
forth therein with respect to the approval thereof are true in all material
respects, under the penalties of perjury.
/s/ Charles B Johnson
Charles B. Johnson
President
FRANKLIN CUSTODIAN FUNDS, INC.
777 Mariners Island Blvd.
San Mateo, California 94404
Franklin/Templeton Distributors, Inc.
777 Mariners Island Blvd.
San Mateo, California 94404
Re: Amended and Restated Distribution Agreement
Gentlemen:
We (the "Fund") are a corporation or business trust operating as an open-end
management investment company or "mutual fund", which is registered under the
Investment Company Act of 1940 (the "1940 Act") and whose shares are registered
under the Securities Act of 1933 (the "1933 Act"). We desire to issue one or
more series or classes of our authorized but unissued shares of capital stock or
beneficial interest (the "Shares") to authorized persons in accordance with
applicable Federal and State securities laws. The Fund's Shares may be made
available in one or more separate series, each of which may have one or more
classes.
You have informed us that your company is registered as a broker-dealer under
the provisions of the Securities Exchange Act of 1934 and that your company is a
member of the National Association of Securities Dealers, Inc. You have
indicated your desire to act as the exclusive selling agent and distributor for
the Shares. We have been authorized to execute and deliver this Distribution
Agreement ("Agreement") to you by a resolution of our Board of Directors or
Trustees ("Board") passed at a meeting at which a majority of Board members,
including a majority who are not otherwise interested persons of the Fund and
who are not interested persons of our investment adviser, its related
organizations or with you or your related organizations, were present and voted
in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in
consideration of the agreements on your part herein expressed and upon the terms
and conditions set forth herein, we hereby appoint you as the exclusive sales
agent for our Shares and agree that we will deliver such Shares as you may sell.
You agree to use your best efforts to promote the sale of Shares, but are not
obligated to sell any specific number of Shares.
However, the Fund and each series retain the right to make direct sales of
its Shares without sales charges consistent with the terms of the then current
prospectus and applicable law, and to engage in other legally authorized
transactions in its Shares which do not involve the sale of Shares to the
general public. Such other transactions may include, without limitation,
transactions between the Fund or any series or class and its shareholders only,
transactions involving the reorganization of the Fund or any series, and
transactions involving the merger or combination of the Fund or any series with
another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your
obligations hereunder as an independent contractor and shall have no authority
or power to obligate or bind us by your actions, conduct or contracts except
that you are authorized to promote the sale of Shares. You may appoint
sub-agents or distribute through dealers or otherwise as you may determine from
time to time, but this Agreement shall not be construed as authorizing any
dealer or other person to accept orders for sale or repurchase on our behalf or
otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent
to the net asset value per share of that series and class plus any applicable
percentage of the public offering price as sales commission or as otherwise set
forth in our then current prospectus. On each business day on which the New York
Stock Exchange is open for business, we will furnish you with the net asset
value of the Shares of each available series and class which shall be determined
in accordance with our then effective prospectus. All Shares will be sold in the
manner set forth in our then effective prospectus and statement of additional
information, and in compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales
commission on the sale or redemption, as appropriate, of each series and class
of each Fund's Shares in the amount of any initial, deferred or contingent
deferred sales charge as set forth in our then effective prospectus. You may
allow any sub-agents or dealers such commissions or discounts from and not
exceeding the total sales commission as you shall deem advisable, so long as any
such commissions or discounts are set forth in our current prospectus to the
extent required by the applicable Federal and State securities laws. You may
also make payments to sub-agents or dealers from your own resources, subject to
the following conditions: (a) any such payments shall not create any obligation
for or recourse against the Fund or any series or class, and (b) the terms and
conditions of any such payments are consistent with our prospectus and
applicable federal and state securities laws and are disclosed in our prospectus
or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to
compensation for your services as provided in any Distribution Plan adopted
as to any series and class of any Fund's Shares pursuant to Rule 12b-1 under
the 1940 Act.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in
those jurisdictions where they have been properly registered or are exempt from
registration, and only to those groups of people which the Board may from time
to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to
the Fund's shareholder services agent, for acceptance on behalf of the Fund. At
or prior to the time of delivery of any of our Shares you will pay or cause to
be paid to the custodian of the Fund's assets, for our account, an amount in
cash equal to the net asset value of such Shares. Sales of Shares shall be
deemed to be made when and where accepted by the Fund's shareholder services
agent. The Fund's custodian and shareholder services agent shall be identified
in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares for
your own account for purposes of resale to the public, but you may purchase
Shares for your own investment account upon your written assurance that the
purchase is for investment purposes and that the Shares will not be resold
except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net asset
value to certain of your and our affiliated persons pursuant to the applicable
provisions of the federal securities statutes and rules or regulations
thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940
Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial
statements of our company to be included in any Post-Effective
Amendments ("Amendments") to our Registration Statement under
the 1933 Act or 1940 Act, including the prospectus and
statement of additional information included therein;
(b) Of the preparation, including legal fees, and printing of
all Amendments or supplements filed with the Securities and
Exchange Commission, including the copies of the
prospectuses included in the Amendments and the first 10
copies of the definitive prospectuses or supplements
thereto, other than those necessitated by your (including
your "Parent's") activities or Rules and Regulations
related to your activities where such Amendments or
supplements result in expenses which we would not otherwise
have incurred;
(c) Of the preparation, printing and distribution of any
reports or communications which we send to our existing
shareholders; and
(d) Of filing and other fees to Federal and State securities
regulatory authorities necessary to continue offering our
Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any supplements
thereto and statements of additional information which are
necessary to continue to offer our Shares;
(b) Of the preparation, excluding legal fees, and printing of all
Amendments and supplements to our prospectuses and statements
of additional information if the Amendment or supplement
arises from your (including your "Parent's") activities or
Rules and Regulations related to your activities and those
expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales
literature, of reports or other communications which we have
prepared for distribution to our existing shareholders; and
(d) Incurred by you in advertising, promoting and selling our
Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information
with respect to each series and class of Shares, in such form and signed by such
of our officers as you may reasonably request, and we warrant that the
statements therein contained, when so signed, will be true and correct. We will
also furnish you with such information and will take such action as you may
reasonably request in order to qualify our Shares for sale to the public under
the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will
furnish you with annual audited financial statements of our books and accounts
certified by independent public accountants, with semi-annual financial
statements prepared by us, with registration statements and, from time to time,
with such additional information regarding our financial condition as you may
reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus,
you will not issue any sales material or statements except literature or
advertising which conforms to the requirements of Federal and State securities
laws and regulations and which have been filed, where necessary, with the
appropriate regulatory authorities. You will furnish us with copies of all such
materials prior to their use and no such material shall be published if we shall
reasonably and promptly object.
You shall comply with the applicable Federal and State laws and
regulations where our Shares are offered for sale and conduct your affairs with
us and with dealers, brokers or investors in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to
us for redemption or repurchase by us within seven business days after your
acceptance of the original purchase order for such Shares, you will immediately
refund to us the full sales commission (net of allowances to dealers or brokers)
allowed to you on the original sale, and will promptly, upon receipt thereof,
pay to us any refunds from dealers or brokers of the balance of sales
commissions reallowed by you. We shall notify you of such tender for redemption
within 10 days of the day on which notice of such tender for redemption is
received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall
not be deemed to be exclusive, and you may render similar services and act as
an underwriter, distributor or dealer for other investment companies in the
offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date
of its execution, and shall remain in effect for a period of two (2) years. The
Agreement is renewable annually thereafter, with respect to the Fund or, if the
Fund has more than one series, with respect to each series, for successive
periods not to exceed one year (i) by a vote of (a) a majority of the
outstanding voting securities of the Fund or, if the Fund has more than one
series, of each series, or (b) by a vote of the Board, AND (ii) by a vote of a
majority of the members of the Board who are not parties to the Agreement or
interested persons of any parties to the Agreement (other than as members of the
Board), cast in person at a meeting called for the purpose of voting on the
Agreement.
This Agreement may at any time be terminated by the Fund or by any
series without the payment of any penalty, (i) either by vote of the Board or by
vote of a majority of the outstanding voting securities of the Fund or any
series on 90 days' written notice to you; or (ii) by you on 90 days' written
notice to the Fund; and shall immediately terminate with respect to the Fund and
each series in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to
suspend or limit the public offering of Shares upon two days' written notice
to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the
State of California and shall be interpreted and construed to further promote
the operation of the Fund as an open-end investment company. This Agreement
shall supersede all Distribution Agreements and Amendments previously in effect
between the parties. As used herein, the terms "Net Asset Value," "Offering
Price," "Investment Company," "Open-End Investment Company," "Assignment,"
"Principal Underwriter," "Interested Person," "Parent," "Affiliated Person," and
"Majority of the Outstanding Voting Securities" shall have the meanings set
forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to
our securities holders to which you would otherwise be subject by reason of
willful misfeasance, bad faith or gross negligence in the performance of your
duties hereunder, or by reason of your reckless disregard of your obligations
and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by
signing each of the enclosed copies, whereupon this will become a binding
agreement as of the date set forth below.
Very truly yours,
FRANKLIN CUSTODIAN FUNDS, INC.
By: /s/ Deborah R. Gatzek
Accepted:
Franklin/Templeton Distributors, Inc.
By: /s/ Gregory E. Johnson
DATED: March 29, 1995
Bleakley Platt & Schmidt
One North Lexington Avenue
P.O. Box 5056
White Plains, N.Y. 10602-5056
(914) 949-2700
Facsmile (914) 683-6956
November 21, 1995
Franklin Custodian Funds, Inc.
777 Mariners Island Boulevard
San Mateo, California 94404
Re: Franklin Custodian Funds, Inc.
Rule 24e-1 Opinion
-----------------
Gentlemen:
You have indicated that, pursuant to Section 24(e)(1) of the Investment
Company Act, Franklin Custodian Funds, Inc. (the "Fund") intends to file
Post-Effective Amendment No. 72 to its registration statement under the
Securities Act to register 19,070,307 additional shares of capital stock for
sale pursuant to its currently effective registration statement under the
Securities Act and have requested our opinion relating thereto.
We have examined the Certificate of Incorporation and By-Laws of the Fund
and the various pertinent records, documents and proceedings we deem material.
We have also examined the Notification of Registration and the Registration
Statements filed under the Investment Company Act of 1940 ("Investment Company
Act") and the Securities Act of 1933 ("Securities Act"), all as amended to date,
as well as other items we deem material to this opinion.
Based upon the foregoing, it is our opinion that the Fund is a valid and
subsisting corporation organized under the laws of the State of Maryland and
that the proposed registration of the 19,070,307 shares of capital stock is
proper and such shares of stock, when issued, will be legally outstanding, fully
paid and nonassessable and the holders of such shares of stock will have all the
rights provided for with respect to such holdings by the Certificate of
Incorporation and the laws of the State of Maryland.
We hereby consent to the use of this opinion as an exhibit to
Post-Effective Amendment No. 72 to be filed by the Fund, covering the
registration of the said shares under the Securities Act and the applications
and registration statements, and amendments thereto, filed in accordance with
the securities laws of the several states in which shares of the Fund are
offered, and we further consent to reference in the Prospectus and Statement of
Additional Information for the Fund to the fact that this opinion concerning the
legality of the issue has been rendered by us.
Very Truly Yours,
/s/ Bleakley, Platt & Schmidt
Bleakley, Platt & Schmidt
CONSENT OF INDEPENDENT AUDITORS
To the Board of Directors of Franklin Custodian Funds, Inc.
We consent to the incorporation by reference in Post-Effective Amendment No. 72
to the Registration Statement of Franklin Custodian Funds, Inc., on Form N-1A
(File No 2-11346) of our report dated November 3, 1995 on our audit of the
financial statements and financial highlights of Franklin Custodian Funds, Inc.,
which report is included in the Annual Report to Shareholders for the year ended
September 30, 1995, which is incorporated by reference in the Registration
Statement.
/s/ Coopers & Lybrand L.L.P
COOPERS & LYBRAND L.L.P.
San Francisco, California
November 28, 1995
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN CUSTODIAN FUNDS, INC.
II. Fund and Class: UTILITIES SERIES - CLASS II
INCOME SERIES - CLASS II
U.S. GOVERNMENT SECURITIES SERIES - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.50%
B. Service Fee: 0.15%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors or
Trustees of the Investment Company (the "Board"), including a majority of the
Board members who are not interested persons of the Investment Company and who
have no direct, or indirect financial interest in the operation of the Plan (the
"non-interested Board members"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a quarterly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average daily
net assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: March 30, 1995
Investment Company
By: /s/ Deborah R. Gatzek
Franklin/Templeton Distributors, Inc.
By: /s/ Gregory E. Johnson
CLASS II DISTRIBUTION PLAN
I. Investment Company: FRANKLIN CUSTODIAN FUNDS, INC.
II. Fund and Class: GROWTH SERIES - CLASS II
III. Maximum Per Annum Rule 12b-1 Fees for Class II Shares
(as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.75%
B. Service Fee: 0.25%
PREAMBLE TO CLASS II DISTRIBUTION PLAN
The following Distribution Plan (the "Plan") has been adopted pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the
Investment Company named above ("Investment Company") for the class II shares
(the "Class") of each Fund named above ("Fund"), which Plan shall take effect as
of the date class II shares are first offered (the "Effective Date of the
Plan"). The Plan has been approved by a majority of the Board of Directors or
Trustees of the Investment Company (the "Board"), including a majority of the
Board members who are not interested persons of the Investment Company and who
have no direct, or indirect financial interest in the operation of the Plan (the
"non-interested Board members"), cast in person at a meeting called for the
purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of
payments and terms of the Management Agreement between the Investment Company
and Franklin Advisers, Inc. and the terms of the Underwriting Agreement between
the Investment Company and Franklin/Templeton Distributors, Inc.
("Distributors"). The Board concluded that the compensation of Advisers, under
the Management Agreement, and of Distributors, under the Underwriting Agreement,
was fair and not excessive. The approval of the Plan included a determination
that in the exercise of their reasonable business judgment and in light of their
fiduciary duties, there is a reasonable likelihood that the Plan will benefit
the Fund and its shareholders.
DISTRIBUTION PLAN
1. (a) The Fund shall pay to Distributors a quarterly fee not to exceed
the above-stated maximum distribution fee per annum of the Class' average daily
net assets represented by shares of the Class, as may be determined by the Board
from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall
pay (i) to Distributors for payment to dealers or others, or (ii) directly to
others, an amount not to exceed the above-stated maximum service fee per annum
of the Class' average daily net assets represented by shares of the Class, as
may be determined by the Fund's Board from time to time, as a service fee
pursuant to servicing agreements which have been approved from time to time by
the Board, including the non-interested Board members.
2. (a) Distributors shall use the monies paid to it pursuant to Paragraph
1(a) above to assist in the distribution and promotion of shares of the Class.
Payments made to Distributors under the Plan may be used for, among other
things, the printing of prospectuses and reports used for sales purposes,
expenses of preparing and distributing sales literature and related expenses,
advertisements, and other distribution-related expenses, including a pro-rated
portion of Distributors' overhead expenses attributable to the distribution of
Class shares, as well as for additional distribution fees paid to securities
dealers or their firms or others who have executed agreements with the
Investment Company, Distributors or its affiliates, which form of agreement has
been approved from time to time by the Trustees, including the non-interested
trustees. In addition, such fees may be used to pay for advancing the commission
costs to dealers or others with respect to the sale of Class shares.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be
used to pay dealers or others for, among other things, furnishing personal
services and maintaining shareholder accounts, which services include, among
other things, assisting in establishing and maintaining customer accounts and
records; assisting with purchase and redemption requests; arranging for bank
wires; monitoring dividend payments from the Fund on behalf of customers;
forwarding certain shareholder communications from the Fund to customers;
receiving and answering correspondence; and aiding in maintaining the investment
of their respective customers in the Class. Any amounts paid under this
paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which
form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make
pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers,
Distributors or other parties on behalf of the Fund, Advisers or Distributors
make payments that are deemed to be payments by the Fund for the financing of
any activity primarily intended to result in the sale of Class shares issued by
the Fund within the context of Rule 12b-1 under the Act, then such payments
shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include
payments specified in paragraphs 1 and 2, plus any other payments deemed to be
made pursuant to the Plan under this paragraph, exceed the amount permitted to
be paid pursuant to the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., Article III, Section 26(d).
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies reimbursed to it and to others under the
Plan, and shall furnish the Board with such other information as the Board may
reasonably request in connection with the payments made under the Plan in order
to enable the Board to make an informed determination of whether the Plan should
be continued.
5. The Plan shall continue in effect for a period of more than one year
only so long as such continuance is specifically approved at least annually by
the Board, including the non-interested Board members, cast in person at a
meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated at any time, without penalty, by vote of a majority of the
outstanding voting securities of the Fund or by vote of a majority of the
non-interested Board members, on not more than sixty (60) days' written notice,
or by Distributors on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may
not be amended to increase materially the amount to be spent for distribution
pursuant to Paragraph 1 hereof without approval by a majority of the Fund's
outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into
pursuant to this Plan, shall be approved by the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Fund's non-interested Board members shall be committed to the discretion of such
non-interested Board members.
This Plan and the terms and provisions thereof are hereby accepted and
agreed to by the Investment Company and Distributors as evidenced by their
execution hereof.
Date: March 30, 1995
Investment Company
By: /s/ Deborah R. Gatzek
Franklin/Templeton Distributors, Inc.
By: /s/ Gregory E. Johnson
Franklin Fund
Form of Multiple Class Plan
This Multiple Class Plan (the "Plan") has been adopted by a
majority of the Board of [Directors/Trustees] of the Franklin
Fund (the "Fund") [for its series]. The Board has
determined that the Plan is in the best interests of each class
and the Fund as a whole. The Plan sets forth the provisions
relating to the establishment of multiple classes of shares for
the Fund.
1. The Fund shall offer two classes of shares, to be
known as Franklin Fund - Class I and Franklin
Fund - Class II.
2. Class I shares shall carry a front-end sales charge ranging
from
[ % - %], and Class II shares shall carry a front-end
sales charge of 1.00%.
3. Class I shares shall not be subject to a contingent deferred
sales charge ("CDSC") except in the following limited
circumstances. On investments of $1 million or more, a contingent
deferred sales charge of 1.00% of the lesser of the then-current
net asset value or the original net asset value at the time of
purchase applies to redemptions of those investments within the
contingency period of 12 months from the calendar month following
their purchase. The CDSC is waived in certain circumstances, as
described in the Fund's prospectus.
4. Class II shares redeemed within 18 months of their purchase
shall be assessed a CDSC of 1.00% on the lesser of the then-
current net asset value or the original net asset value at the
time of purchase. The CDSC is waived in certain circumstances as
described in the Fund's prospectus.
5. The Rule 12b-1 Plan associated with Class I shares may be used
to reimburse Franklin/Templeton Distributors, Inc. (the
"Distributor") or others for expenses incurred in the promotion
and distribution of the shares of Class I. Such expenses include,
but are not limited to, the printing of prospectuses and reports
used for sales purposes, expenses of preparing and distributing
sales literature and related expenses, advertisements, and other
distribution-related expenses, including a prorated portion of
the Distributor's overhead expenses attributable to the
distribution of Class shares, as well as any distribution or
service fees paid to securities dealers or their firms or others
who have executed a servicing agreement with the Fund for the
Class, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with Class II shares has two
components. The first component is a shareholder servicing fee,
to be paid to broker-dealers, banks, trust companies and others
who will provide personal assistance to shareholders in servicing
their accounts. The second component is an asset-based sales
charge to be retained by the Distributor during the first year
after sale of shares, and, in subsequent years, to be paid to
dealers or retained by the Distributor to be used in the
promotion and distribution of Class II shares, in a manner
similar to that described above for (Class I shares.
The Plans shall operate in accordance with the Rules of Fair
Practice of the National Association of Securities Dealers, Inc.,
Article III, section 26(d).
6. The only difference in expenses as between Class I and Class
It shares shall relate to differences in the Rule 12b-1 plan
expenses of each class, as described in each class' Rule 12b-1
Plan.
7. There shall be no conversion features associated with the
Class I and Class II shares.
8. Shares of Class I of the Fund may only be exchanged for shares
of Class I of any other fund in the Franklin/Templeton Group and
may not be exchanged into the Franklin/Templeton Money Fund I! of
the Franklin/Templeton Money Fund Trust. Shares of Class II of
the Fund may only be exchanged for shares of Class II of any
other fund in the Franklin/Templeton Group and may also be
exchanged into the Franklin/Templeton Money Fund II of the
Franklin/Templeton Money Fund Trust.
9. Each Class will vote separately with respect to the Rule 12b-1
Plan related to that Class.
10. On an ongoing basis, the [directors/trustees] pursuant to
their fiduciary responsibilities under the 1940 Act and
otherwise, will monitor the Fund for the existence of any
material conflicts between the interests of the two classes of
shares. The [directors/trustees], including a majority of the
independent [directors/trustees], shall take such action as is
reasonably necessary to eliminate any such conflict that may
develop. Franklin Advisers, Inc. and Franklin/Templeton
Distributors, Inc. shall be responsible for alerting the Board to
any material conflicts that arise.
11. All material amendments to this Plan must be approved by a
majority of the [directors/trustees] of the Fund, including a
majority of the [directors/trustees] who are not interested
persons of the Fund.
SCHEDULE A
INVESTMENT COMPANY FUND & CLASS; TITAN NUMBER
Franklin Gold Fund Franklin Gold Fund - Class II; 232
Franklin Equity Fund Franklin Equity Fund - Class II; 234
AGE High Income Fund, Inc. AGE High Income Fund - Class II; 205
Franklin Custodian Funds, Inc. Growth Series - Class II; 206
Utilities Series - Class II; 207
Income Series - Class II; 209
U.S. Government Securities
Series - Class II; 210
Franklin California Tax-Free Franklin California Tax-Free Income
Income Fund, Inc. Fund - Class II; 212
Franklin New York Tax-Free Franklin New York Tax-Free Income
Income Fund, Inc. Fund - Class II; 215
Franklin Federal Tax-Free Franklin Federal Tax-Free Income
Income Fund Fund -Class II; 216
Franklin Managed Trust Franklin Rising Dividends
Fund - Class II; 258
Franklin California Tax-Free Franklin California Insured Tax-Free
Trust Income Fund - Class II; 224
Franklin New York Tax-Free Trust Franklin New York Insured Tax-Free
Income Fund - Class II; 281
Franklin Investors Securities Franklin Global Government Income
Trust Fund - Class II; 235
Franklin Equity Income
Fund - Class II; 239
Franklin Strategic Series Franklin Global Utilities
Fund - Class II; 297
Franklin Real Estate Securities Franklin Real Estate Securities
Trust Fund - Class II; 292
INVESTMENT COMPANY FUND AND CLASS; TITAN NUMBER
Franklin Tax-Free Franklin Alabama Tax-Free Income Fund - Class II; 264
Trust Franklin Arizona Tax-Free Income Fund - Class II; 226
Franklin Colorado Tax-Free Income Fund - Class II; 227
Franklin Connecticut Tax Free Income
Fund - Class II; 266
Franklin Florida Tax-Free Income Fund - Class II; 265
Franklin Georgia Tax-Free Income Fund - Class II; 228
Franklin High Yield Tax-Free Income Fund - Class II; 230
Franklin Insured Tax-Free Income Fund - Class II; 221
Franklin Louisiana Tax-Free Income Fund - Class II; 268
Franklin Maryland Tax-Free Income Fund - Class II; 269
Franklin Massachusetts Insured Tax-Free Income
Fund - Class II; 218
Franklin Michigan Insured Tax-Free Income
Fund - Class II; 219
Franklin Minnesota Insured Tax-Free Income
Fund - Class II; 220
Franklin Missouri Tax-Free Income Fund - Class II; 260
Franklin New Jersey Tax-Free Income
Fund - Class II; 271
Franklin North Carolina Tax-Free Income
Fund - Class II; 270
Franklin Ohio Insured Tax-Free Income
Fund - Class II; 222
Franklin Oregon Tax-Free Income Fund - Class II; 261
Franklin Pennsylvania Tax-Free Income
Fund - Class II; 229
Franklin Puerto Rico Tax-Free Income
Fund - Class II; 223
Franklin Texas Tax-Free Income Fund - Class II; 262
Franklin Virginia Tax-Free Income Fund - Class II; 263
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 021
<NAME> FRANKLIN DYNATECH SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 37,149,708
<INVESTMENTS-AT-VALUE> 81,960,715
<RECEIVABLES> 11,279,758
<ASSETS-OTHER> 740
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 93,241,213
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 254,575
<TOTAL-LIABILITIES> 254,575
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 45,677,718
<SHARES-COMMON-STOCK> 7,274,083
<SHARES-COMMON-PRIOR> 6,846,728
<ACCUMULATED-NII-CURRENT> 845,843
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,652,070
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 44,811,007
<NET-ASSETS> 92,986,638
<DIVIDEND-INCOME> 357,113
<INTEREST-INCOME> 1,277,096
<OTHER-INCOME> 0
<EXPENSES-NET> (777,299)
<NET-INVESTMENT-INCOME> 856,910
<REALIZED-GAINS-CURRENT> 1,652,070
<APPREC-INCREASE-CURRENT> 19,366,149
<NET-CHANGE-FROM-OPS> 21,875,129
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (337,856)
<DISTRIBUTIONS-OF-GAINS> (896,402)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,713,802
<NUMBER-OF-SHARES-REDEEMED> (2,395,735)
<SHARES-REINVESTED> 109,288
<NET-CHANGE-IN-ASSETS> 25,574,054
<ACCUMULATED-NII-PRIOR> 326,789
<ACCUMULATED-GAINS-PRIOR> 896,402
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 491,673
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 777,299
<AVERAGE-NET-ASSETS> 77,247,292
<PER-SHARE-NAV-BEGIN> 9.850
<PER-SHARE-NII> .118
<PER-SHARE-GAIN-APPREC> 2.991
<PER-SHARE-DIVIDEND> (.049)
<PER-SHARE-DISTRIBUTIONS> (.130)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.78
<EXPENSE-RATIO> 1.010
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1995 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 011
<NAME> FRANKLIN GROWTH SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 393,355,492
<INVESTMENTS-AT-VALUE> 678,280,818
<RECEIVABLES> 39,469,696
<ASSETS-OTHER> 138,801
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 717,889,315
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 863,221
<TOTAL-LIABILITIES> 863,221
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 423,373,994
<SHARES-COMMON-STOCK> 36,788,747
<SHARES-COMMON-PRIOR> 34,527,726
<ACCUMULATED-NII-CURRENT> 6,336,281
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,390,493
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 284,925,326
<NET-ASSETS> 717,026,094
<DIVIDEND-INCOME> 10,686,837
<INTEREST-INCOME> 981,675
<OTHER-INCOME> 0
<EXPENSES-NET> (5,303,170)
<NET-INVESTMENT-INCOME> 6,365,342
<REALIZED-GAINS-CURRENT> 2,390,493
<APPREC-INCREASE-CURRENT> 156,404,122
<NET-CHANGE-FROM-OPS> 165,159,957
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,752,106)
<DISTRIBUTIONS-OF-GAINS> (1,478,440)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 8,141,407
<NUMBER-OF-SHARES-REDEEMED> (6,256,752)
<SHARES-REINVESTED> 376,366
<NET-CHANGE-IN-ASSETS> 200,406,573
<ACCUMULATED-NII-PRIOR> 4,733,342
<ACCUMULATED-GAINS-PRIOR> 1,478,440
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,969,094
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,303,170
<AVERAGE-NET-ASSETS> 590,892,310
<PER-SHARE-NAV-BEGIN> 14.960
<PER-SHARE-NII> .170
<PER-SHARE-GAIN-APPREC> 4.427
<PER-SHARE-DIVIDEND> (.135)
<PER-SHARE-DISTRIBUTIONS> (.042)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.380
<EXPENSE-RATIO> .900
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1995 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 012
<NAME> FRANKLIN GROWTH SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 393,355,492
<INVESTMENTS-AT-VALUE> 678,280,818
<RECEIVABLES> 39,469,696
<ASSETS-OTHER> 138,801
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 717,889,315
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 863,221
<TOTAL-LIABILITIES> 863,221
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 423,373,994
<SHARES-COMMON-STOCK> 215,274
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 6,336,281
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,390,493
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 284,925,326
<NET-ASSETS> 717,026,094
<DIVIDEND-INCOME> 10,686,837
<INTEREST-INCOME> 981,675
<OTHER-INCOME> 0
<EXPENSES-NET> (5,303,170)
<NET-INVESTMENT-INCOME> 6,365,342
<REALIZED-GAINS-CURRENT> 2,390,493
<APPREC-INCREASE-CURRENT> 156,404,122
<NET-CHANGE-FROM-OPS> 165,159,957
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 233,454
<NUMBER-OF-SHARES-REDEEMED> (18,180)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 200,406,573
<ACCUMULATED-NII-PRIOR> 4,733,342
<ACCUMULATED-GAINS-PRIOR> 1,478,440
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,969,094
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,303,170
<AVERAGE-NET-ASSETS> 1,687,119
<PER-SHARE-NAV-BEGIN> 16.880
<PER-SHARE-NII> .023
<PER-SHARE-GAIN-APPREC> 2.427
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.330
<EXPENSE-RATIO> 1.790
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 031
<NAME> FRANKLIN UTILITIES SERIES-CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 2,354,367,602
<INVESTMENTS-AT-VALUE> 2,532,464,125
<RECEIVABLES> 247,346,329
<ASSETS-OTHER> 7,018
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,779,817,472
<PAYABLE-FOR-SECURITIES> 166,643
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,306,406
<TOTAL-LIABILITIES> 5,473,049
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,569,174,767
<SHARES-COMMON-STOCK> 283,663,463
<SHARES-COMMON-PRIOR> 308,870,219
<ACCUMULATED-NII-CURRENT> 7,091,302
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 19,981,831
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 178,096,523
<NET-ASSETS> 2,774,344,423
<DIVIDEND-INCOME> 140,974,426
<INTEREST-INCOME> 32,964,817
<OTHER-INCOME> 0
<EXPENSES-NET> (19,137,916)
<NET-INVESTMENT-INCOME> 154,801,327
<REALIZED-GAINS-CURRENT> 19,981,831
<APPREC-INCREASE-CURRENT> 398,271,409
<NET-CHANGE-FROM-OPS> 573,054,567
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (154,359,654)
<DISTRIBUTIONS-OF-GAINS> (1,914,525)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 44,589,208
<NUMBER-OF-SHARES-REDEEMED> (82,691,074)
<SHARES-REINVESTED> 12,895,110
<NET-CHANGE-IN-ASSETS> 201,836,139
<ACCUMULATED-NII-PRIOR> 6,749,793
<ACCUMULATED-GAINS-PRIOR> 1,914,525
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 12,223,592
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 19,137,916
<AVERAGE-NET-ASSETS> 2,631,433,209
<PER-SHARE-NAV-BEGIN> 8.330
<PER-SHARE-NII> .527
<PER-SHARE-GAIN-APPREC> 1.424
<PER-SHARE-DIVIDEND> (.524)
<PER-SHARE-DISTRIBUTIONS> (.007)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.750
<EXPENSE-RATIO> .730
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FRANKLIN
CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 032
<NAME> FRANKLIN UTILITIES SERIES-CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 2,354,367,602
<INVESTMENTS-AT-VALUE> 2,532,464,125
<RECEIVABLES> 247,346,329
<ASSETS-OTHER> 7,018
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,779,817,472
<PAYABLE-FOR-SECURITIES> 166,643
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,306,406
<TOTAL-LIABILITIES> 5,473,049
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,569,174,767
<SHARES-COMMON-STOCK> 858,757
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 7,091,302
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 19,981,831
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 178,096,523
<NET-ASSETS> 2,774,344,423
<DIVIDEND-INCOME> 140,974,426
<INTEREST-INCOME> 32,964,817
<OTHER-INCOME> 0
<EXPENSES-NET> (19,137,916)
<NET-INVESTMENT-INCOME> 154,801,327
<REALIZED-GAINS-CURRENT> 19,981,831
<APPREC-INCREASE-CURRENT> 398,271,409
<NET-CHANGE-FROM-OPS> 573,054,567
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (100,164)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 859,907
<NUMBER-OF-SHARES-REDEEMED> (9,894)
<SHARES-REINVESTED> 8,744
<NET-CHANGE-IN-ASSETS> 201,836,139
<ACCUMULATED-NII-PRIOR> 6,749,793
<ACCUMULATED-GAINS-PRIOR> 1,914,525
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 12,223,592
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 19,137,916
<AVERAGE-NET-ASSETS> 3,852,030
<PER-SHARE-NAV-BEGIN> 8.890
<PER-SHARE-NII> .228
<PER-SHARE-GAIN-APPREC> .880
<PER-SHARE-DIVIDEND> (.248)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.750
<EXPENSE-RATIO> 1.210
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1995 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 051
<NAME> FRANKLIN U.S. GOVERNMENT SECURITIES SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 10,976,257,070
<INVESTMENTS-AT-VALUE> 11,054,296,795
<RECEIVABLES> 73,544,909
<ASSETS-OTHER> 21,194
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,127,862,898
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,563,026
<TOTAL-LIABILITIES> 14,563,026
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,681,263,137
<SHARES-COMMON-STOCK> 1,615,683,903
<SHARES-COMMON-PRIOR> 1,793,328,472
<ACCUMULATED-NII-CURRENT> 24,585,885
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (670,588,875)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 78,039,725
<NET-ASSETS> 11,113,299,872
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 904,126,288
<OTHER-INCOME> 0
<EXPENSES-NET> (67,582,733)
<NET-INVESTMENT-INCOME> 836,543,555
<REALIZED-GAINS-CURRENT> (57,944,614)
<APPREC-INCREASE-CURRENT> 636,365,221
<NET-CHANGE-FROM-OPS> 1,414,964,162
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (818,027,564)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 79,866,189
<NUMBER-OF-SHARES-REDEEMED> (312,000,457)
<SHARES-REINVESTED> 54,489,699
<NET-CHANGE-IN-ASSETS> (555,447,567)
<ACCUMULATED-NII-PRIOR> 6,172,385
<ACCUMULATED-GAINS-PRIOR> (674,065,421)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 50,269,876
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 67,582,733
<AVERAGE-NET-ASSETS> 11,147,323,784
<PER-SHARE-NAV-BEGIN> 6.510
<PER-SHARE-NII> .497
<PER-SHARE-GAIN-APPREC> .348
<PER-SHARE-DIVIDEND> (.485)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 6.870
<EXPENSE-RATIO> .610
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FRANKLIN CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1995 ANNUAL REPORT AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 052
<NAME> FRANKLIN U.S. GOVERNMENT SECURITIES SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 10,976,257,070
<INVESTMENTS-AT-VALUE> 11,054,296,795
<RECEIVABLES> 73,544,909
<ASSETS-OTHER> 21,194
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,127,862,898
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,563,026
<TOTAL-LIABILITIES> 14,563,026
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11,681,263,137
<SHARES-COMMON-STOCK> 1,707,173
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 24,585,885
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (670,588,875)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 78,039,725
<NET-ASSETS> 11,113,299,872
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 904,126,288
<OTHER-INCOME> 0
<EXPENSES-NET> (67,582,733)
<NET-INVESTMENT-INCOME> 836,543,555
<REALIZED-GAINS-CURRENT> (57,944,614)
<APPREC-INCREASE-CURRENT> 636,365,221
<NET-CHANGE-FROM-OPS> 1,414,964,162
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (102,491)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,732,757
<NUMBER-OF-SHARES-REDEEMED> (33,818)
<SHARES-REINVESTED> 8,234
<NET-CHANGE-IN-ASSETS> (555,447,567)
<ACCUMULATED-NII-PRIOR> 6,172,385
<ACCUMULATED-GAINS-PRIOR> (674,065,421)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 50,269,876
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 67,582,733
<AVERAGE-NET-ASSETS> 4,593,356
<PER-SHARE-NAV-BEGIN> 6.670
<PER-SHARE-NII> .206
<PER-SHARE-GAIN-APPREC> .167
<PER-SHARE-DIVIDEND> (.193)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 6.850
<EXPENSE-RATIO> 1.180
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE FRANKLIN
CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 041
<NAME> FRANKLIN INCOME SERIES - CLASS I
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 4,760,588,619
<INVESTMENTS-AT-VALUE> 4,967,057,243
<RECEIVABLES> 999,400,000
<ASSETS-OTHER> 5,248,606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,971,705,849
<PAYABLE-FOR-SECURITIES> 14,403,221
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,692,271
<TOTAL-LIABILITIES> 20,095,492
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,673,290,124
<SHARES-COMMON-STOCK> 2,556,652,794
<SHARES-COMMON-PRIOR> 2,203,316,304
<ACCUMULATED-NII-CURRENT> 1,820,982
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 69,953,906
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 206,545,345
<NET-ASSETS> 5,951,610,357
<DIVIDEND-INCOME> 126,530,779
<INTEREST-INCOME> 339,513,933
<OTHER-INCOME> 0
<EXPENSES-NET> (36,892,324)
<NET-INVESTMENT-INCOME> 429,152,388
<REALIZED-GAINS-CURRENT> 34,267,583
<APPREC-INCREASE-CURRENT> 247,694,923
<NET-CHANGE-FROM-OPS> 711,114,894
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (424,364,184)
<DISTRIBUTIONS-OF-GAINS> (62,309,280)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 583,098,728
<NUMBER-OF-SHARES-REDEEMED> (365,297,824)
<SHARES-REINVESTED> 135,535,586
<NET-CHANGE-IN-ASSETS> 1,060,105,813
<ACCUMULATED-NII-PRIOR> 8,679,566
<ACCUMULATED-GAINS-PRIOR> 77,441,293
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 23,887,430
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 36,892,324
<AVERAGE-NET-ASSETS> 5,184,833,203
<PER-SHARE-NAV-BEGIN> 2.22
<PER-SHARE-NII> .180
<PER-SHARE-GAIN-APPREC> .108
<PER-SHARE-DIVIDEND> (.180)
<PER-SHARE-DISTRIBUTIONS> (.028)
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.30
<EXPENSE-RATIO> .710
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM THE FRANKLIN
CUSTODIAN FUNDS, INC. SEPTEMBER 30, 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<SERIES>
<NUMBER> 042
<NAME> FRANKLIN INCOME SERIES - CLASS II
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<INVESTMENTS-AT-COST> 4,760,588,619
<INVESTMENTS-AT-VALUE> 4,967,057,243
<RECEIVABLES> 999,400,000
<ASSETS-OTHER> 5,248,606
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,971,705,849
<PAYABLE-FOR-SECURITIES> 14,403,221
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,692,271
<TOTAL-LIABILITIES> 20,095,492
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 5,673,290,124
<SHARES-COMMON-STOCK> 28,581,175
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,820,982
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 69,953,906
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 206,545,345
<NET-ASSETS> 5,951,610,357
<DIVIDEND-INCOME> 126,530,779
<INTEREST-INCOME> 339,513,933
<OTHER-INCOME> 0
<EXPENSES-NET> (36,892,324)
<NET-INVESTMENT-INCOME> 429,152,388
<REALIZED-GAINS-CURRENT> 34,267,583
<APPREC-INCREASE-CURRENT> 247,694,923
<NET-CHANGE-FROM-OPS> 711,114,894
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (658,851)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 29,016,628
<NUMBER-OF-SHARES-REDEEMED> (604,942)
<SHARES-REINVESTED> 169,489
<NET-CHANGE-IN-ASSETS> 1,060,105,813
<ACCUMULATED-NII-PRIOR> 8,679,566
<ACCUMULATED-GAINS-PRIOR> 77,441,293
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 23,887,430
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 36,892,324
<AVERAGE-NET-ASSETS> 26,359,543
<PER-SHARE-NAV-BEGIN> 2.18
<PER-SHARE-NII> .079
<PER-SHARE-GAIN-APPREC> .113
<PER-SHARE-DIVIDEND> (.072)
<PER-SHARE-DISTRIBUTIONS> .000
<RETURNS-OF-CAPITAL> .000
<PER-SHARE-NAV-END> 2.30
<EXPENSE-RATIO> 1.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
